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Monday, 30 January 2023
Euro Up as De Guindos Joins ECB Chorus Flagging Possible July Rate Hike

Euro Up as De Guindos Joins ECB Chorus Flagging Possible July Rate Hike

2022-10-30

To many, it will seem like a no-brainer. The euro has depreciated in value vs the US dollar this year, and the ECB is widely believed to be preparing for a rate hike in July. However, the ECB’s recent statements have highlighted that the current stance of monetary policy is not adequate. It is prepared to increase rates again in the future, if necessary. It is therefore important for the eurozone to have a stable and effective monetary policy.

If the ECB raises rates again next month, it will affect the euro significantly. The best way to protect the euro against a rate hike by the ECB is to have a strong monetary policy. That’s why recent comments by ECB chairman Mario Draghi have come as a big surprise.

In a press conference after the ECB’s last monetary policy meeting in mid-June, Draghi signaled that the ECB’s asset purchase program could be ended earlier than planned. Instead of hiking rates in June as had been widely expected, the ECB left them as low as possible until the end of the year.

This left the door open for another rate increase in July. In other words, the ECB signaled that another rate hike was not out of the question.

If this is the case, the euro would benefit tremendously. It would act as a stabilizing influence against the strong dollar and the possible rise in interest rates in the US. In this article, we look at the pros

ECB Shows Commitment to Strong Monetary Policy
At the May 2017 ECB meeting, the interest rate binding nature of which was confirmed by the ECB’s president, Draghi, was underlined once again. The ECB’s key interest rate cannot exceed “a sustainable level that allows the German economy to sustainably function without external support,” said Draghi.

“The ECB’s job is to maintain a certain level of price stability in the eurozone and inflation is expected to stay well below 2 percent over the medium term,” Draghi added.

However, in its June 2017 statement, the ECB left the door open to hiking rates again. The single most important factor that determined the ECB’s decision was, as always, the outlook for the European economy. The ECB fears that the slowdown in the eurozone will lead to rising inflation and interest rates in the long run. As a result, the ECB has a justified reason to be worried about inflation in the long run.

The euro benefits from a stronger eurozone monetary policy
Just as the ECB is committed to maintaining low inflation, the eurozone also has a strong interest in keeping the euro weak. This is due to the fact that a weaker currency makes the bloc more attractive to foreign investors. This, in turn, increases the potential for growth in the region. The benefits of a stronger single currency for the eurozone can be summarised as follows:

 

Increased trade and investment opportunities – The stronger euro would make the region more attractive to foreign investors. This would boost economic growth, as foreign investors would have a better insight into the strength of the currency and could therefore buy more goods and services in euros.

The ECB is prepared to hike rates in the future
It’s important to remember that while the ECB’s statement that another rate hike was not out of the question was positive news for the euro, it was also a pretty clear message that the bank was ready to raise rates again in the future. Not only that, but the ECB has been increasing interest rates systematically since 2011, when it first started its quantitative easing program (QE).

In other words, the ECB is prepared for another rate increase and, in this case, it is expected to raise rates by a larger amount. The ECB, in other words, is prepared for a higher level of inflation.

Japan’s influence
Many people may not realize it, but the ECB is deeply influenced by the actions of the Japanese authorities. The ECB was formed almost entirely with the aim of keeping the yen weak.

This, in turn, has had a significant impact on the outlook for the euro. The yen has weakened significantly against the dollar and the euro in recent months. This, in turn, has had a significant impact on the outlook for EU and Japanese exports. Exports are one of the few areas where the Japanese influence has been felt.

The Japanese influence on the eurozone can be seen most clearly in the area of monetary policy. The ECB is, in essence, a Japanese-led institution.

Summary
The ECB’s recent comments have come as a big surprise. The single most important factor that determined the ECB’s decision was the outlook for the European economy. The ECB fears that the slowdown in the eurozone will lead to rising inflation and interest rates in the long run. As a result, the ECB has a justified reason to be worried about inflation in the long run. The eurozone also has a strong interest in keeping the single currency weak due to the benefits of a stronger currency for the region.

The ECB’s recent comments have come as a big surprise. The single most important factor that determined the ECB’s decision was the outlook for the European economy. The ECB fears that the slowdown in the eurozone will lead to rising inflation and interest rates in the long run. As a result, the ECB has a justified reason to be worried about inflation in the long run. The eurozone also has a strong interest in keeping the single currency weak due to the benefits of a stronger currency for the region.

 

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