ECB's Kocher: Don't see evidence of second-round effects
European Central Bank (ECB) Governing Council member Martin Kocher said on Friday that he doesn’t see any hard evidence of second-round effects, but the central bank will act if the inflation outlook deteriorates.
Meanwhile, Slovenian central bank chief Primož Dolenc said that the risks ahead remain high, adding that developments around the war in Iran reinforce the adverse risk.
Key quotes from ECB’s Kocher
Recent developments in oil markets are concerning.
ECB is in a position to be vigilant for the next couple of weeks.
I don't see any hard evidence of second-round effects.
ECB will act if inflation outlook deteriorates.
Growth forecast isn't great, but don't see a recession.
Market reaction
At the time of writing, the EUR/USD pair is up 0.11% on the day to trade at 1.1385.
Kocher flags conditional tightening risk as inflation vigilance rises
Kocher’s 6.2/10 FXS Speechtracker score sits slightly below the 6.4/10 historic average, but the emphasis on acting “if the inflation outlook becomes worse” marks a mildly hawkish tilt versus recent communication. The focus on deteriorating medium-term inflation expectations, concern over oil market developments, and the pledge that the ECB “will act if the inflation outlook deteriorates” all reinforce a conditional tightening bias that can underpin the Euro on upside inflation surprises.
At the same time, the remark that there is “no hard evidence of second-round effects” and that growth is weak but not recessionary tempers the hawkishness, suggesting no rush to hike absent a clear shock. For FX, this mix of vigilance and patience implies the Euro may trade with a modest upside skew on inflation data and oil-driven repricing, but without a strong catalyst for a sustained repricing of the ECB path in the immediate term.
ECB FAQs
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.
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.
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.
