ECB’s Zigman sees a fairly strong chance of a December rate rise

Another interest rate rise at the December meeting is highly likely, according to European Central Bank (ECB) Governing Council member Ante Zigman, whose comments appeared in a Bloomberg report.

ECB: Key Questions Answered

The ECB shapes monetary policy and influences the euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the eurozone’s reserve bank, setting the region’s interest rates and overseeing its monetary policy. Maintaining price stability is the ECB’s main mandate, with the aim of keeping inflation at around 2%. To achieve this, it primarily raises or lowers interest rates. The euro usually strengthens when interest rates are relatively high, 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.

Quantitative Easing (QE) typically weakens the euro

When conditions become extreme, the European Central Bank can turn to a policy tool known as Quantitative Easing (QE). Under QE, the ECB prints euros to purchase assets from banks and other financial institutions, generally government or corporate bonds. The euro usually weakens as a result. Used as a last resort, QE is intended for situations in which interest rate cuts alone are unlikely to deliver price stability. The ECB deployed it during the Great Financial Crisis in 2009-11, again in 2015 as inflation stayed persistently low, and during the COVID pandemic.

Quantitative tightening (QT) usually supports the euro

Once an economic recovery is under way and inflation begins to rise following QE, the central bank can reverse the process through quantitative tightening (QT). Under QE, the European Central Bank (ECB) supplies financial institutions with liquidity by buying government and corporate bonds. With QT, by contrast, it halts further bond purchases and no longer reinvests the principal repaid as bonds in its existing portfolio mature. This is generally supportive, or bullish, for the euro.

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