Why does ECB’s Nagel see another hike as second-round risks build?

The prospect of another interest rate hike by the European Central Bank (ECB) was signalled by Joachim Nagel, President of the Bundesbank and a member of the ECB Governing Council.

Delivering a keynote address at the 79th Siemens Bankers Conference on Friday, Nagel said: “If the situation stays as it is, it seems highly probable that we’ll have to act again,” and noted that monthly price increases raise the likelihood of second-round effects.

On core inflation, he observed that it “is still elevated, and short-term inflation expectations have risen in line with the jump in headline inflation.”

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

What are the key points?

Further action by the ECB is highly likely to be necessary.

Upward pressure is evident in the early stages of the pricing chain.

Inflation expectations for the short term have moved higher.

Since September, the outlook has worsened.

How Is the Euro Trading Today?

The Euro recorded its strongest performance against the Australian Dollar today. The table below presents the percentage changes in the Euro (EUR) against the major currencies listed.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.23%	0.21%	0.03%	0.02%	0.48%	0.40%	0.41%
EUR	-0.23%		-0.03%	-0.19%	-0.21%	0.24%	0.17%	0.18%
GBP	-0.21%	0.03%		-0.19%	-0.16%	0.26%	0.20%	0.21%
JPY	-0.03%	0.19%	0.19%		-0.01%	0.45%	0.36%	0.38%
CAD	-0.02%	0.21%	0.16%	0.00%		0.46%	0.38%	0.39%
AUD	-0.48%	-0.24%	-0.26%	-0.45%	-0.46%		-0.07%	-0.07%
NZD	-0.40%	-0.17%	-0.20%	-0.36%	-0.38%	0.07%		0.02%
CHF	-0.41%	-0.18%	-0.21%	-0.38%	-0.39%	0.07%	-0.02%

Percentage movements between major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. For instance, choosing the Euro on the left and following that row across to the US Dollar gives the percentage change for EUR (base)/USD (quote) in the corresponding cell.

ECB: Common Questions Answered

How does the ECB work, and what does it mean for the Euro?

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone's reserve bank, setting interest rates and overseeing monetary policy across the region. Maintaining price stability is the ECB's core mandate, which entails keeping inflation close to 2%. Adjustments to interest rates, either upwards or downwards, are its main means of achieving this objective. Higher interest rates relative to those elsewhere generally support a stronger Euro, while the reverse also holds. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone's national banks and six permanent members, among them ECB President Christine Lagarde.

How does Quantitative Easing (QE) work, and why does it affect the Euro?

A weaker Euro is the usual outcome of Quantitative Easing (QE), a policy instrument the European Central Bank may deploy in extreme circumstances. Under QE, the ECB prints Euros to purchase assets, typically government or corporate bonds, from banks and other financial institutions. This measure is a last resort 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 persisted at low levels, and during the COVID pandemic.

Why does Quantitative tightening (QT) matter for the Euro, and how does it work?

Usually supportive, or bullish, for the Euro, Quantitative tightening (QT) reverses QE. It follows QE once an economic recovery is under way and inflation begins to increase. During QE, the European Central Bank (ECB) supplies liquidity to financial institutions by buying government and corporate bonds from them. Under QT, by contrast, the ECB halts further bond purchases and no longer reinvests the principal repaid when bonds already in its portfolio mature.