ECB's Panetta: Tensions in energy markets are a cause for concern for financial stability

Additional Remarks

Leading indicators, in particular the decline in household confidence, point to a possible slowdown in the real economy.

Tensions in energy markets are a cause for concern not only for the immediate impact on inflation and growth, but also for financial stability.

Pre-existing vulnerabilities could become channels through which shocks are amplified.

Non-bank financial intermediaries in some sectors show levels of leverage and liquidity that could prove inadequate during periods of acute stress.

Rise in value of Dollar and pressure on long-term interest rates and capital outflows from emerging markets reflects a growing preference for safer assets.

Changes in global investors’ risk perception can quickly lead to pressure on the government bonds of highly indebted countries.

It's important that markets’ perception of Italy’s public finances has improved, given current geopolitical tensions.

ECB's adverse scenarios pointing to normalisation of energy supply and recovery between the fourth quarter of 2026 and 2027 are now more likely.

Market reaction

There seems to be no immediate impact of ECB Panetta's comments on the Euro (EUR). As of writing, EUR/USD trades 0.5% lower to near 1.1530 due to the risk-off mood.

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.