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ECB’s Moulin: Banks can withstand higher rates; France needs to repair its finances
Rising interest rates are manageable for banks, according to Emmanuel Moulin, Governor of the Banque de France and a member of the European Central Bank (ECB) Governing Council. Speaking on Wednesday, he said that “banks can deal with rising rates.”
On France, Moulin said the solution to its “financial problems is in France and not in Frankfurt,” suggesting that fiscal rather than monetary policy is the principal challenge facing Paris.
Main points:
Banks are able to cope with higher interest rates
France must resolve its financial problems at home, rather than in Frankfurt
The risk of a feedback loop between banks and sovereigns no longer exists
Scepticism over the government's proposal to increase the regulated savings cap
ECB Explained
Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the eurozone's central bank, setting the region's interest rates and overseeing monetary policy. Maintaining price stability is the ECB's main mandate, meaning it aims to keep inflation at around 2%. To meet that objective, it primarily adjusts interest rates upwards or downwards. Higher rates generally strengthen the euro, while lower rates tend to have the opposite effect. 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 central banks and six permanent members, among them ECB President Christine Lagarde.
When conditions become extreme, the European Central Bank may turn to Quantitative Easing (QE). Under this policy, the ECB creates euros to purchase assets from banks and other financial institutions, typically government or corporate bonds. The euro usually weakens as a result. Used as a last resort, QE is an option when interest rate cuts alone are unlikely to deliver price stability. The ECB deployed it during the Great Financial Crisis in 2009-11, again in 2015 as inflation stayed persistently low, and during the Covid pandemic.
Once an economic recovery is under way and inflation begins to rise, QE can be followed by its opposite, Quantitative tightening (QT). 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 its existing bond holdings mature. This is generally supportive of, or bullish for, the euro.
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