December ECB rate hike obvious despite energy relief, says Nagel

A December rate hike gained firmer backing from Bundesbank President Joachim Nagel. Speaking to Bloomberg TV, Nagel, who also sits on the European Central Bank (ECB) Governing Council, said “it is rather obvious that we have to increase in December,” reinforcing the case for an increase next month.

Lower energy prices since the US midterm elections were welcome news, Nagel added. While market expectations do not determine the central bank’s decisions, he emphasised that “we’ll do what’s needed to return inflation to 2%.”

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

Main points:

A December increase is clearly necessary

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 action needed to bring inflation back to 2%

France needs to address its fiscal challenges

Euro Performance Today

The Euro’s strongest performance today was against the Australian Dollar. The table below lists today’s percentage changes in the Euro (EUR) against the major currencies shown.

	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 major currencies appear in the heat map. Select the base currency from the left-hand column and the quote currency from the top row. Selecting the Euro on the left and following its row across to the US Dollar, for instance, 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. It determines the region’s interest rates and oversees monetary policy. Price stability is the ECB’s main mandate, with inflation kept at around 2%. Interest rate increases and cuts are its principal means of meeting that objective. Higher relative interest rates typically strengthen the Euro; lower relative rates tend to have the opposite effect. 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 central banks and six permanent members, among them ECB President Christine Lagarde.

Quantitative Easing (QE): How It Affects the Euro

Under extreme conditions, the European Central Bank can 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 generally weakens as a result. When interest rate cuts alone are unlikely to deliver price stability, QE offers 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.

Quantitative tightening (QT): Implications for the Euro

Once economic recovery takes hold and inflation begins to rise, Quantitative tightening (QT) reverses the process of QE. Under QE, the European Central Bank (ECB) injects liquidity into financial institutions by buying government and corporate bonds from them. Under QT, it halts further bond purchases and no longer reinvests principal repaid as its existing bond holdings mature. This is generally supportive, or bullish, for the Euro.