ECB’s Nagel: No clear signs that inflation has fed through to price and wage setting

European Central Bank (ECB) policymaker and Bundesbank President Joachim Nagel said in a speech in Sorrento, Italy during the European trading session on Monday that the impact of energy shock-driven inflation has yet not fed into wage growth.

Comments

Longer-term market-based and expert expectations remain consistent with the Eurosystem’s 2% inflation target.

Gas prices are especially vulnerable because storage levels are low.

Europe may need to buy substantially higher volumes during the winter.

The destruction of refining capacity is driving up prices for refined petroleum products significantly.

Drought, wildfires ‌and ⁠fertiliser shortages also pose risks to food prices.

This was increasing the relative attractiveness ⁠of bonds among reserve asset managers.

The case for diversification into gold remains significant given continued geopolitical stress and the credit risk associated with high debt levels.

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Market reaction

No immediate impact on the Euro (EUR) from ECB Nagel's comments. At press time, EUR/USD is down 0.3% to near 1.1215 even after recovering a majority of its early losses.

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.