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This briefing report evaluates the ECB's monetary policy in a context of declining inflation and stagnant growth. Inflation risks have been averted and, after a period of relatively tight policy in 2024, benchmark comparisons indicate that the current interest rate is consistent with the ECB's mandate. The prevailing economic and inflation outlook supports further rate cuts. However, the high level of economic policy uncertainty necessitates cautious adjustments. Moreover, official ECB communications ...

In this issue... 鈼� US President Trump starts enacting his economic policy agenda and threatens the EU with tariffs. 鈼� Headline inflation falls to 2.4% as underlying indicators ease. 鈼� ECB reduces key policy rate by 25 bps. 鈼� The euro continues to strengthen against the dollar amid growing uncertainty on US鈥檚 tariffs. 鈼� The Fed keeps rate unchanged among economic uncertainty while challenges to independence arise. 鈼� ECB reckons new US approach to cryptos and CBDCs strengthens the case for ...

In this paper, different assessments of the ECB鈥檚 monetary policy stance are reviewed, beyond the mere observation of the sharp rise and subsequent decline of the policy rate. Overall, the monetary policy stance has been more moderate during the tightening cycle than what has been indicated by the policy rate increase. However, following the decline in energy prices, this past and relatively mild restrictive policy stance poses a risk to economic activity. This document was provided by the Economic ...

In most countries in the European Union (EU) and in the rest of the world, debt is treated more favourably from a tax perspective than equity, with interest payments on loans generally being tax deductible. In contrast, costs relating to equity financing, such as dividends, are mostly non-tax deductible. This unequal treatment of debt and equity leads to a bias towards debt in businesses' investment decisions and can lead to high levels of indebtedness in the EU corporate sector. On 11 May 2022, ...

Achieving Sustainable Development Goals and climate targets in the face of rising debt levels requires financial resources which the current Global Financial Architecture (GFA) is failing to meet. In this context, calls for reforming the GFA have taken both front and centre stage. These calls are not just for raising more finance, but for making the GFA more equitable, just and responsive to crises by addressing longstanding limitations affecting most countries worldwide. This analysis uses desktop ...

After a series of unprecedented interest rate hikes on both sides of the Atlantic, inflation in the euro area and the United States is cooling down from a 40-year high. However, uncertainty about the inflation and growth outlook remains high, as the European Central Bank and the Federal Reserve are considering their next moves. Five papers were prepared by the ECON Committee鈥檚 Monetary Expert Panel, making a comparative assessment of inflation dynamics and monetary policy stances in the two monetary ...

Restrictive monetary policy dampens inflation effectively, but it also raises stress in financial markets. This happens through revaluations of financial assets on banks鈥� balance sheets and through dampened economic activity. Moreover, apart from the positive effect of exiting negative interest rates, banks鈥� net interest margin is generally negatively affected by interest rate hikes. With most of the disinflationary impact of higher interest rates yet to materialise, monetary policy should allow ...

The interest rate cost of EU borrowing for non-repayable support, which lies with the EU budget, could be twice as high as what was initially estimated at the start of the EU鈥檚 2021-2027 budget cycle. This Bruegel paper finds that the European Commission鈥檚 issuance strategy can still be improved to reduce EU borrowing costs at the margin. It should also continue to work on building market infrastructures for EU bonds. Moreover if EU countries want to reap the full benefits of EU borrowing, some political ...

Even if QT is as inefficient as QE at affecting inflation, now is the time to cut the size of central banks鈥� balance sheets. The stabilising effects of large balance sheets are eroded as the financial markets adapt to excess reserves. If QT proves to be financially destabilising, it can be temporarily interrupted, possibly even reversed. This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the ...

This paper points to new multifaceted and often interconnected sources of risks (including high-impact tail risks) and the challenges posed to supervisory actions. It also makes the important case that traditional risk management tools might face limitations in the current situation. We discuss both geopolitical and related risks as well as other risks in the context of rising interest rates and a volatile macroeconomic environment. The challenge for banks will be to be prepared for such extreme ...