ECB's Kocher: No need to delay rate hikes if energy prices don’t improve swiftly

Key quotes

Economic recovery now threatened, inflation risks rise amid Middle East conflict.

Risk of stagflation trend can't be ruled out despite resilient economy and labor market.

Length of conflict will be the decisive factor.

In April it was reasonable to delay interest rate hikes.

No need to delay rate hikes if energy prices don’t improve swiftly.

Prolonged Iran conflict and sustained high energy costs heighten risk of second-round effects.

ECB will stay alert and act promptly and decisively if needed.

Medium- and long-term inflation expectations more crucial for interest rate decisions; initial signs of change but no major shifts yet.

Market reaction

At the time of writing, the EUR/USD pair is down 0.26% on the day at 1.1755.

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.