ECB’s Moulin: Higher rates manageable for banks; France must repair finances

“banks can deal with rising rates.” That was the message on Wednesday from Emmanuel Moulin, Governor of the Banque de France and a member of the European Central Bank (ECB) Governing Council.

Turning to France, Moulin said the answer to its “financial problems is in France and not in Frankfurt,” suggesting that fiscal rather than monetary policy is Paris's central challenge.

Main points:

Higher interest rates are manageable for banks

France, rather than Frankfurt, holds the answer to its financial problems

Risk of a feedback loop between banks and sovereigns no longer present

Government proposal to increase the regulated savings cap met with scepticism

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ECB: Key Questions Answered

ECB policy and its impact on the Euro

Around 2% inflation is the European Central Bank's price stability objective. Based in Frankfurt, Germany, the ECB serves as the Eurozone's central bank, setting interest rates and conducting the region's monetary policy. Raising or cutting rates is its main means of maintaining price stability, its primary mandate. Relatively high rates generally strengthen the Euro, while lower rates tend to have the opposite effect. 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 central banks and six permanent members, among them ECB President Christine Lagarde.

Quantitative Easing (QE): How asset purchases affect the Euro

When rate cuts alone are unlikely to deliver price stability, the European Central Bank can turn to Quantitative Easing (QE) as a last resort in extreme circumstances. Under QE, the ECB prints Euros to purchase assets from banks and other financial institutions, typically government or corporate bonds. The policy generally weakens the Euro. 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.

Quantitative tightening (QT): How reduced bond purchases affect the Euro

Usually supportive of the Euro, quantitative tightening (QT) reverses QE once economic recovery is under way and inflation begins to climb. Under QE, the European Central Bank (ECB) supplies liquidity to financial institutions by buying government and corporate bonds from them. With QT, it ceases further bond purchases and no longer reinvests the principal repaid as bonds in its existing portfolio mature.