ECB's Knot: Impact of trade war on long term is likely inflationary
European Central Bank (ECB) policymaker Klaas Knot said on Wednesday that a trade was in the long term is a negative supply shock, per Reuters.
Key takeaways
"The impact of a trade war on the long term is likely inflationary."
"Risk is that we move to a supply/demand situation like in 2022, which means we have to be vigilant on inflation."
"Market functioning so far has been preserved."
"Reversal of bond markets needs to be monitored."
"Reality on markets can of course change quickly."
"Europe can only build resilience by strengthening internal cohesion."
"EU needs to strengthen internal market."
"As Europeans, there is no choice but to come together and realize our own strength."
Market reaction
EUR/USD holds its ground following these comments and was last seen trading at 1.1020, where it was up 0.55% on the day.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.