The European Central Bank (ECB) is set to continue cutting interest rates through the first half of 2025, according to ECB governing council member Klaas Knot. Knot expects interest rates to fall to a level between 2% and 3%, a significant adjustment from the ultra-low levels seen before the pandemic.
### Key Quotes
– Knot stated, “I would expect us to continue to gradually reduce interest rates in the coming time, also in the first half of 2025.”
– He also added, “I don’t expect rates to return to the extremely low levels we saw before the pandemic. They will likely end up on a somewhat more natural level. I don’t know where exactly, but somewhere starting with a 2.”
### Market Reaction
At the time of writing, the EUR/USD pair was up 0.07% on the day at 1.1188.
### ECB FAQs
#### What is the European Central Bank (ECB)?
The ECB, located in Frankfurt, Germany, serves as the reserve bank for the Eurozone. It is responsible for setting interest rates and managing monetary policy for the region. The primary mandate of the ECB is to maintain price stability, aiming to keep inflation at around 2%. The ECB Governing Council, consisting of heads of Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde, makes monetary policy decisions at eight meetings held annually.
#### What is Quantitative Easing (QE) and how does it affect the Euro?
In extreme circumstances, the ECB can implement QE, a policy tool involving the printing of Euros to purchase assets such as government or corporate bonds from financial institutions. QE often leads to a weaker Euro and is used when lowering interest rates alone is insufficient to achieve price stability. The ECB utilized QE during the Great Financial Crisis in 2009-11, in 2015 due to persistently low inflation, and during the covid pandemic.
#### What is Quantitative Tightening (QT) and its impact on the Euro?
QT is the opposite of QE and occurs after an economic recovery when inflation begins to rise. In QE, the ECB buys bonds to provide liquidity, while in QT, the ECB stops purchasing bonds and reinvesting maturing principal. QT is typically positive or bullish for the Euro.
In conclusion, the ECB’s decision to continue cutting interest rates has significant implications for financial markets and the overall economy. Investors and individuals alike should monitor these developments closely, as they can impact currency exchange rates, inflation levels, and overall economic stability. Stay informed and consider seeking professional financial advice to navigate the changing landscape of monetary policy.