ECB’s Villeroy: Trump administration actions offer opportunity to boost Euro's international role
European Central Bank (ECB) policymaker and Bank of France head Francois Villeroy de Galhau said on Wednesday that they estimate the trade conflict to reduce Eurozone growth by 0.25 percentage points this year, per Reuters.
Key takeaways
"The shock will not be negligible but it won't be a recession."
"US President Donald Trump administration's actions harm the Dollar's supremacy, offers opportunity to boost Euro's international role."
"ECB is fully mobilized to ensure financing of the economy and financial stability."
"ECB monitors the financial system to make sure there is enough liquidity, including in times of market stress."
"Certain market actors, like leveraged hedge funds, could face big liquidity needs."
Market reaction
EUR/USD holds its ground following these comments and was last seen rising 0.68% on the day at 1.1033.
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.