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ECB’s Sleijpen sees persistent Iran shock but no second-round effects yet
The shock stemming from Iran is proving more persistent than previously expected, Olaf Sleijpen, President of De Nederlandsche Bank and a member of the European Central Bank (ECB) Governing Council, said on Tuesday. He stated that “the Iran shock is more persistent than earlier thought,” while stressing that the central bank was not seeing “second-round effects yet.”
With monetary tightening slowing the European Union economy, Sleijpen also warned that “the advance in energy risks has knock-on inflation effects,” linking rising energy risks to inflation.
Main points from Sleijpen’s remarks:
The shock from Iran is lasting longer than previously anticipated
Second-round effects are not yet clearly evident
Rising energy risks are having knock-on effects on inflation
Europe’s economy is being slowed by tightening
Paris must resolve France’s problems
ECB questions answered
Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the eurozone’s central bank, setting the region’s interest rates and conducting its monetary policy. Maintaining price stability is the ECB’s primary mandate, meaning inflation should remain at around 2%. To pursue that objective, it chiefly 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 at eight meetings each 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 are extreme, the European Central Bank can turn to Quantitative Easing (QE). Under this policy, it prints euros to purchase assets, generally government or corporate bonds, from banks and other financial institutions. The euro usually weakens as a result. Used as a last resort, QE is deployed when interest rate cuts alone are unlikely to deliver price stability. The ECB employed the policy 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 following QE and inflation begins to rise, central banks can reverse QE through quantitative tightening (QT). During QE, the European Central Bank (ECB) supplies liquidity to financial institutions by buying government and corporate bonds from them. Under QT, by contrast, it ceases further bond purchases and no longer reinvests the principal repaid as its existing bond holdings mature. This is generally supportive, or bullish, for the euro.
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