ECB’s Sleijpen: Iran shock continues, no second-round effects so far

The Iran shock is proving more persistent than previously expected. Speaking on Tuesday, Olaf Sleijpen, President of De Nederlandsche Bank and a member of the European Central Bank (ECB) Governing Council, said that “the Iran shock is more persistent than earlier thought,” although the central bank is not seeing “second-round effects yet.”

Tightening is weighing on the European Union economy, Sleijpen added. He also warned that “the advance in energy risks has knock-on inflation effects,” linking increased energy risks to wider inflation pressures.

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

Main points:

Iran shock proves more persistent than previously expected

No clear evidence of second-round effects so far

Rising energy risks have knock-on effects on inflation

Europe's economy slows as tightening takes effect

Paris must resolve France's problems

ECB: Key Questions Answered

ECB: Its Role and Impact on the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone's reserve bank, setting interest rates and overseeing the region's monetary policy. Price stability is its core mandate, with inflation kept at around 2%. To pursue that objective, the ECB primarily adjusts interest rates upwards or downwards. Higher relative interest rates generally strengthen the Euro, while lower relative rates tend to weaken it. 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 banks and six permanent members, among them ECB President Christine Lagarde.

Quantitative Easing (QE): How It Influences the Euro

Usually associated with a weaker Euro, Quantitative Easing (QE) is a policy tool the European Central Bank can deploy 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 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 amid persistently low inflation, and during the covid pandemic.

Quantitative Tightening (QT): Implications for the Euro

Generally supportive of the Euro, quantitative tightening (QT) reverses QE. It follows QE once an economic recovery is under way and inflation begins to rise. During QE, the European Central Bank (ECB) supplies liquidity to financial institutions by buying government and corporate bonds. Under QT, it halts further bond purchases and no longer reinvests the principal repaid as its existing bond holdings mature.