ECB's Rehn: Keeping inflation expectations anchored is essential

European Central Bank (ECB) official Olli Rehn emphasized the importance of maintaining stable inflation expectations during a recent speech. Rehn's comments come as global inflation projections have been affected by high energy prices due to the ongoing tension between the US and Iran in the Strait of Hormuz. Despite the disruption, no clear signs of second-round effects have been observed yet, with wage growth and outlook remaining moderate.

So far, the Euro (EUR) has not shown a significant reaction to Rehn's remarks. The EUR/USD exchange rate, currently trading around 1.1600, is only marginally higher, down by 0.2%. The European Central Bank (ECB) in Frankfurt, Germany, is responsible for setting interest rates and managing monetary policy in the Eurozone, with its primary goal being to maintain price stability, which is defined as keeping inflation close to 2%.

The ECB's main tool for achieving this objective is adjusting interest rates. When rates are higher, the Euro typically strengthens, and vice versa. The ECB Governing Council meets eight times a year to make monetary policy decisions, with the President of the ECB, Christine Lagarde, among the key decision-makers. In extreme situations, the ECB can also use Quantitative Easing (QE), a policy where the ECB prints Euros and buys assets such as government or corporate bonds from banks and financial institutions. This usually results in a weaker Euro.

Should an economic recovery and inflation rise, the ECB may reverse the process through Quantitative Tightening (QT). In QT, the ECB stops buying more bonds and avoids reinvesting the principal maturing on the bonds it already holds. This approach is usually positive for the Euro.