“Good news” on inflation: ECB’s Nagel sees no second-round effects
- Joachim Nagel says the global economy remains on a growth path despite the Middle East crisis.
- The policymaker welcomes easing core and services inflation and sees no second-round inflation effects.
- Nagel says he would have preferred coordinated intervention on the Yen and notes that the use of the Euro was discussed at the G20.
Joachim Nagel, European Central Bank (ECB) Governing Council member and Bundesbank President, expressed confidence on Tuesday in the global economic outlook despite geopolitical tensions in the Middle East.
According to comments reported by Reuters, Nagel said the global economy remains “on a growth path” despite the Middle East crisis.
On inflation, the ECB policymaker welcomed the easing in core and services inflation. He added that he is not seeing second-round effects on inflation.
Nagel also commented on recent foreign exchange interventions involving the Japanese Yen (JPY). He said he would have welcomed coordination on these interventions and noted that the use of the Euro (EUR) in US and Japanese interventions was discussed at the Group of Twenty (G20) meeting.
Key takeaways
The global economy is on a growth path, despite the Middle East crisis.
Easing in core and services inflation is good news, I am not seeing second-round effects on inflation.
I would have welcomed coordination on yen intervention.
Euro use in US/Japan interventions was discussed at the G20.
Market reaction
The Euro (EUR) showed little reaction to Nagel’s comments. EUR/USD trades around 1.1590 at the time of writing on Tuesday, down 0.24% 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.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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