ECB’s Sleijpen: Iran shock continues, but second-round effects have yet to emerge

Although “the Iran shock is more persistent than earlier thought,” the central bank is not observing “second-round effects yet,” Olaf Sleijpen said on Tuesday. Sleijpen is President of De Nederlandsche Bank and a member of the European Central Bank (ECB) Governing Council.

With tightening weighing on the European Union economy, Sleijpen also warned that “the advance in energy risks has knock-on inflation effects,” in his remarks.

What Are the Key Takeaways?

The shock from Iran is proving more persistent than previously anticipated

We are not really observing second-round effects so far

Rising energy risks are having knock-on effects on inflation

Europe's economy is losing momentum as tightening takes effect

Paris must resolve France's problems

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ECB: Common Questions Answered

How does the ECB's role shape the Euro?

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone's reserve bank, setting the region's interest rates and directing its monetary policy. Maintaining price stability is the ECB's principal mandate, with the aim of keeping inflation at around 2%. To achieve this, it primarily adjusts interest rates upwards or downwards. The Euro generally strengthens when interest rates are relatively high, while the reverse usually holds when rates are relatively low. 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 banks and six permanent members, among them ECB President Christine Lagarde.

How does Quantitative Easing (QE) work, and what does it mean for the Euro?

When conditions become extreme, Quantitative Easing is one policy tool available to the European Central Bank. Under QE, the ECB prints Euros to purchase assets from banks and other financial institutions, typically government or corporate bonds. The Euro usually weakens as a result. When interest rate cuts alone are unlikely to deliver price stability, QE serves as a last resort. 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.

How does Quantitative tightening (QT) work, and why does it affect the Euro?

Once an economic recovery is under way and inflation begins to rise following QE, central banks may move to its opposite: Quantitative tightening (QT). Under QE, the European Central Bank (ECB) supplies liquidity to financial institutions by purchasing government and corporate bonds from them. With QT, however, the ECB halts additional bond purchases and no longer reinvests principal repayments from its existing bonds as they mature. The effect on the Euro is generally positive, or bullish.