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With inflation risks rising, ECB’s Nagel flags December rate hike
An interest rate rise by the European Central Bank (ECB) in December “is very likely to be necessary.” That was the assessment on Tuesday from Joachim Nagel, President of the Bundesbank and a member of the ECB’s Governing Council.
With inflationary pressure “higher than expected in September,” Nagel said the deflationary scenario was deteriorating. He also stressed that the ECB can “and must prevent an energy price spike from causing broad-based inflation.”
Main points:
December is very likely to require an interest rate rise
Inflationary pressure exceeds September expectations, bringing the adverse scenario closer
An energy price spike can and must be prevented from triggering broad-based inflation
I am confident that France will bring its budget problems under control
Monetary policy is not the tool for this task
Euro Records Its Strongest Performance Against the Yen Today
Against the Japanese yen, the euro (EUR) recorded its strongest performance today. The table below sets out its percentage changes against the major currencies listed.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.01% | -0.08% | 0.46% | 0.06% | 0.37% | 0.02% | 0.31% | |
| EUR | 0.01% | -0.06% | 0.46% | 0.07% | 0.40% | 0.03% | 0.32% | |
| GBP | 0.08% | 0.06% | 0.53% | 0.14% | 0.45% | 0.07% | 0.38% | |
| JPY | -0.46% | -0.46% | -0.53% | -0.39% | -0.09% | -0.43% | -0.14% | |
| CAD | -0.06% | -0.07% | -0.14% | 0.39% | 0.31% | -0.04% | 0.25% | |
| AUD | -0.37% | -0.40% | -0.45% | 0.09% | -0.31% | -0.35% | -0.07% | |
| NZD | -0.02% | -0.03% | -0.07% | 0.43% | 0.04% | 0.35% | 0.29% | |
| CHF | -0.31% | -0.32% | -0.38% | 0.14% | -0.25% | 0.07% | -0.29% |
Percentage movements between the major currencies are displayed in the heat map. Select the base currency from the left-hand column and the quote currency from the top row. Selecting the euro on the left and following its row across to the US dollar, for instance, gives the percentage change for EUR (base)/USD (quote) in the corresponding cell.
ECB Questions Answered
Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the eurozone’s central bank, setting interest rates and overseeing the region’s monetary policy. Maintaining price stability is the ECB’s primary mandate, meaning inflation should remain at around 2%. Interest rate increases and cuts are its main means of pursuing that goal. A relatively high level of interest rates generally supports a stronger euro, while the reverse also holds. Monetary policy is decided by the ECB Governing Council, which meets eight times a year. The decision-makers comprise the heads of the eurozone’s national central banks and six permanent members, among them ECB President Christine Lagarde.
Faced with extreme circumstances, the European Central Bank may deploy Quantitative Easing (QE). Under this policy, the ECB prints euros to purchase assets from banks and other financial institutions, typically government or corporate bonds. The euro usually weakens as a result. This is a last-resort measure when interest rate cuts alone are unlikely to deliver price stability. The ECB deployed QE during the Great Financial Crisis in 2009-11, again in 2015 as inflation stayed persistently low, and during the Covid pandemic.
Once an economic recovery is under way and inflation begins to climb, Quantitative Tightening (QT) reverses the process of QE. Under QE, the European Central Bank (ECB) supplies liquidity to financial institutions by purchasing government and corporate bonds from them. QT instead sees the ECB cease further bond purchases and stop reinvesting the principal repaid as its existing bonds mature. This is generally supportive, or bullish, for the euro.
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