ECB’s Moulin: Higher rates manageable for banks; France must repair its finances

Banks are equipped to handle higher interest rates, according to Emmanuel Moulin, Governor of the Banque de France and a member of the European Central Bank (ECB) Governing Council. Speaking on Wednesday, he said that “banks can deal with rising rates.”

Pointing to fiscal rather than monetary policy as Paris's main challenge, Moulin also said the solution to France's “financial problems is in France and not in Frankfurt,”

What are the key takeaways?

Banks are able to cope with higher interest rates

France must address its financial problems at home, rather than in Frankfurt

The risk of a feedback loop between banks and sovereigns no longer exists

Sceptical about the government's proposal to increase the regulated savings cap

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Common questions about the ECB

How does the ECB's role affect the Euro?

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone's central bank, setting the region's interest rates and conducting its monetary policy. Maintaining price stability is the ECB's core mandate, with inflation kept at around 2%. To meet this objective, it primarily adjusts interest rates upwards or downwards. Higher relative interest rates generally strengthen the Euro, while lower rates tend to have the opposite effect. 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 central 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?

Quantitative Easing is a policy option available to the European Central Bank in exceptional circumstances. Under QE, the ECB prints Euros to purchase assets from banks and other financial institutions, typically government or corporate bonds. The Euro generally weakens as a result. When interest rate cuts alone are unlikely to deliver price stability, QE is used 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 has taken hold and inflation begins to climb following QE, central banks undertake the reverse process, known as Quantitative tightening (QT). Under QE, the European Central Bank (ECB) injects liquidity into financial institutions by buying government and corporate bonds from them. With QT, however, it ceases additional bond purchases and no longer reinvests principal repayments from maturing bonds in its portfolio. This generally supports the Euro and is considered bullish for the currency.