ECB Debates Cutting Rates Below Neutral in New Easing Cycle

The European Central Bank (ECB) in Frankfurt, Germany, serves as the reserve bank for the Eurozone. The ECB is responsible for setting interest rates and managing monetary policy for the region, with a primary mandate of maintaining price stability, aiming to keep inflation at around 2%. The ECB achieves this goal through adjustments in interest rates, with higher rates typically leading to a stronger Euro and vice versa. The decision-making body, the ECB Governing Council, convenes eight times a year to make monetary policy decisions, with members including heads of Eurozone national banks and six permanent members, including the ECB President, Christine Lagarde.

In exceptional circumstances, the ECB can implement Quantitative Easing (QE) as a policy tool. QE involves the ECB printing Euros to purchase assets, often government or corporate bonds, from financial institutions. This process typically results in a weaker Euro. QE is utilized when traditional interest rate adjustments are insufficient to achieve price stability, as seen during the Great Financial Crisis, in 2015 amid low inflation, and during the recent covid pandemic.

Quantitative tightening (QT) is the counterpart to QE and is enacted following a period of QE when an economic recovery is underway, and inflation is on the rise. In QT, the ECB ceases purchasing additional bonds and stops reinvesting the principal from maturing bonds in its possession. This action typically has a positive (or bullish) impact on the Euro.