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ECB’s De Cos: Euro area probably failed to grow at the end of 2023
The European Central Bank (ECB) Governing Council member Pablo Hernandez de Cos said on Wednesday that the euro area probably failed to grow in the final three months of 2023, per Bloomberg.
Key quotes
"Economic activity has continued to show clear weakness and is only expected to increase its degree of dynamism gradually.”
“In the third quarter, GDP decreased by 0.1% and available indicators suggest stagnation in the fourth.”
“Risks to economic growth remain skewed to the downside.”
“Slowdown in prices is expected to continue in the coming quarters.”
“Although in 2024 the decline will be slower due to upward base effects and the gradual withdrawal of fiscal measures adopted during the energy crisis.”
“In addition to geopolitical developments, the transmission of monetary policy has been surprising us for its strength, which, if extended in the coming years, would translate into lower growth.”
“We’ll have to pay attention in the coming months to different developments that may condition the trajectory of inflation and, therefore, our monetary policy action.”
“The high level of uncertainty means that we must remain very vigilant to avoid both insufficient tightening, which would prevent the achievement of our inflation target, and excessive tightening, which would unnecessarily harm activity and employment.”
Market reaction
The EUR/USD pair is trading higher at 1.0975, up 0.09% on the day.
ECB FAQs
What is the ECB and how does it influence the Euro?
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.
What is Quantitative Easing (QE) and how does it affect the Euro?
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.
What is Quantitative tightening (QT) and how does it affect the Euro?
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.
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