Another rate hike in view as second-round risks grow, ECB’s Nagel says

Further interest rate increases could be needed at the European Central Bank (ECB), Bundesbank President Joachim Nagel indicated. Nagel also sits on the ECB Governing Council.

Delivering a keynote address at the 79th Siemens Bankers Conference on Friday, Nagel said: “If the situation stays as it is, it seems highly probable that we’ll have to act again,” and warned that monthly price increases raise the risk of second-round effects.

On core inflation, he said it “is still elevated, and short-term inflation expectations have risen in line with the jump in headline inflation.”

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Main points:

Further ECB action is highly probable.

Upward pressure is evident at the initial stages of the pricing chain.

Near-term inflation expectations have moved higher.

The outlook has worsened since September.

Euro Performance Today

The Euro (EUR) recorded its strongest performance against the Australian Dollar today. The table below details its percentage moves against the major currencies listed.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.23%	0.21%	0.03%	0.02%	0.48%	0.40%	0.41%
EUR	-0.23%		-0.03%	-0.19%	-0.21%	0.24%	0.17%	0.18%
GBP	-0.21%	0.03%		-0.19%	-0.16%	0.26%	0.20%	0.21%
JPY	-0.03%	0.19%	0.19%		-0.01%	0.45%	0.36%	0.38%
CAD	-0.02%	0.21%	0.16%	0.00%		0.46%	0.38%	0.39%
AUD	-0.48%	-0.24%	-0.26%	-0.45%	-0.46%		-0.07%	-0.07%
NZD	-0.40%	-0.17%	-0.20%	-0.36%	-0.38%	0.07%		0.02%
CHF	-0.41%	-0.18%	-0.21%	-0.38%	-0.39%	0.07%	-0.02%

To read the heat map of percentage moves between major currencies, select the base currency in the left-hand column and the quote currency in the top row. For example, selecting the Euro on the left and following that row across to the US Dollar gives the percentage change for EUR (base)/USD (quote) in the corresponding cell.

ECB: Key Questions Answered

The ECB’s role and its impact on the Euro

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s reserve bank. Responsibility for the region’s interest rates and monetary policy rests with the ECB. Price stability is its core mandate, defined as keeping inflation at around 2%. Raising or cutting interest rates is the main means of pursuing that goal. Higher relative interest rates typically strengthen the Euro, while lower relative rates tend to weaken it. Monetary policy is determined by the ECB Governing Council, which meets eight times a year. The decision-makers comprise the heads of Eurozone national banks and six permanent members, among them ECB President Christine Lagarde.

Quantitative Easing (QE): How it influences the Euro

Under extreme conditions, the European Central Bank may turn to Quantitative Easing (QE). This involves printing Euros to purchase assets, typically 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.

Quantitative tightening (QT): Implications for the Euro

Once an economic recovery takes hold after QE and inflation begins to climb, Quantitative tightening (QT) reverses the easing process. Under QE, the European Central Bank (ECB) supplies liquidity to financial institutions by buying government and corporate bonds. Under QT, it halts further bond purchases and no longer reinvests principal repayments from maturing bonds in its portfolio. This is generally supportive, or bullish, for the Euro.