December rate hike is obvious despite energy relief, says ECB’s Nagel

The case for an interest rate hike next month was reinforced by Bundesbank President Joachim Nagel, who also sits on the European Central Bank (ECB) Governing Council. Speaking to Bloomberg TV, he said that “it is rather obvious that we have to increase in December,” underscoring the need for a December increase.

While welcoming the decline in energy prices since the US midterm elections, Nagel said market expectations do not determine the central bank’s decisions. He nevertheless emphasised that “we’ll do what’s needed to return inflation to 2%.”

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

What were the main takeaways?

The need for an increase in December is rather obvious

Lower energy prices since the US midterms are welcome

Market expectations matter but do not determine decisions

I see no risk of fiscal dominance

We will take the steps needed to bring inflation back to 2%

France needs to examine its fiscal challenges

How Is the Euro Trading Today?

Against the major currencies listed below, the Euro (EUR) recorded its strongest performance against the Australian Dollar today. The table presents the Euro’s percentage changes against these currencies.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.37%	0.49%	0.46%	0.38%	0.75%	0.48%	0.56%
EUR	-0.37%		0.10%	0.05%	0.01%	0.36%	0.11%	0.18%
GBP	-0.49%	-0.10%		-0.06%	-0.09%	0.26%	-0.01%	0.08%
JPY	-0.46%	-0.05%	0.06%		-0.04%	0.32%	0.04%	0.13%
CAD	-0.38%	-0.01%	0.09%	0.04%		0.36%	0.08%	0.17%
AUD	-0.75%	-0.36%	-0.26%	-0.32%	-0.36%		-0.27%	-0.19%
NZD	-0.48%	-0.11%	0.01%	-0.04%	-0.08%	0.27%		0.09%
CHF	-0.56%	-0.18%	-0.08%	-0.13%	-0.17%	0.19%	-0.09%

Percentage movements between the major currencies are displayed in the heat map. Select the base currency in the left-hand column and the quote currency in the top row. For instance, choosing 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: Common Questions Answered

How does the ECB’s role shape the Euro?

Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s reserve bank, setting interest rates and overseeing the region’s monetary policy. Maintaining price stability is the ECB’s primary mandate, with inflation kept at around 2%. It pursues this mainly through increases or reductions in interest rates. The Euro generally strengthens when interest rates are relatively high, while the reverse is also true. Monetary policy is decided by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone’s national 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?

When circumstances are extreme, the European Central Bank may deploy Quantitative Easing (QE). Under this policy, the ECB prints Euros to purchase assets from banks and other financial institutions, typically government or corporate bonds. The Euro usually weakens as a result. Used as a last resort, QE comes into play when interest rate cuts alone are unlikely to deliver price stability. 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 matter for the Euro?

Once an economic recovery is under way and inflation begins to rise following QE, Quantitative tightening (QT) reverses that policy. Under QE, the European Central Bank (ECB) supplies liquidity to financial institutions by purchasing government and corporate bonds. With QT, it halts further bond purchases and no longer reinvests the principal repaid as bonds in its existing portfolio mature. This is generally supportive, or bullish, for the Euro.