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ECB Should Brace for New Shocks, Including Russian Threats: Simkus

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European Central Bank policymaker and Lithuanian central bank governor Gediminas Simkus said the ECB’s current policy stance is appropriate, with inflation at target and interest rates in a neutral zone, but warned that fresh shocks could disrupt this balance. Speaking to Reuters, Simkus highlighted persistent global uncertainty driven by geopolitical tensions, particularly the risk of Russian military aggression in eastern Europe, alongside trade frictions and other external pressures.

Simkus stressed that the ECB must ensure its systems are resilient to such risks, including safeguarding cash distribution and payment infrastructure in case of heightened security threats. He noted that countries bordering Russia face unique challenges, ranging from cyberattacks to airspace incursions, and argued that central banks must remain operationally prepared. He also added that banks need to be ready for longer-term risks such as climate change.

On monetary policy, Simkus said interest rates are firmly on hold at the ECB’s February meeting, as modest inflation fluctuations around 2% are normal. However, he cautioned against signalling future moves, saying the next rate change could equally be a hike or a cut. Emphasising flexibility, he said the ECB should avoid overreacting to short-term data swings and instead focus on broader economic trends, as shocks tend to affect growth before feeding into inflation.

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ECB Should Avoid Rushing Policy Moves Amid Uncertainty, Says Austria’s Kocher

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The European Central Bank (ECB) should be careful about taking preemptive policy action in response to rising uncertainty, Austrian central bank chief Martin Kocher said in an interview with German outlet Platow. Kocher noted that while geopolitical risks have intensified recently, central banks should avoid committing to policy moves before risks clearly materialise.

Kocher pointed to heightened global uncertainty driven partly by fresh geopolitical tensions, including threats of new U.S. trade measures. However, he cautioned that acting too early—especially when inflation risks are not clearly tilted in one direction—could lock policymakers into a difficult position and complicate communication. “Some risks can be addressed in advance, but many cannot,” he said.

He added that over the past six months, risks had shifted “slightly to the positive,” with modestly improved euro zone growth expectations and stable financial markets. While acknowledging recent developments, Kocher said it was too soon to reassess the broader outlook. Financial markets currently expect the ECB to keep interest rates unchanged through 2026.

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G7 to Use Frozen Russian Assets for $50 Billion Ukraine Loan

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The G7 has agreed to utilize frozen Russian assets to raise $50 billion (£39 billion) for Ukraine to aid in its defense against Russian forces. President Joe Biden emphasized this decision as a signal to Russia that the support for Ukraine remains steadfast. However, Moscow has warned of “extremely painful” retaliatory actions. The funds, anticipated to be available by the end of the year, are intended to support Ukraine’s war effort and economic stability in the long term.

At the G7 summit in Italy, Ukrainian President Volodymyr Zelensky and Biden signed a 10-year bilateral security agreement between the US and Ukraine, which Ukraine hailed as “historic.” This agreement involves US military and training aid but does not commit US troops to combat. It aims to enhance Ukraine’s defense capabilities, support its defense industry, and aid in economic and energy recovery. It also stipulates consultations at the highest levels in case of future Russian attacks on Ukraine to decide necessary support measures.

Separately, about $325 billion in Russian assets were frozen by the G7 and the EU following Russia’s 2022 invasion of Ukraine. These assets generate approximately $3 billion annually in interest. The G7 plan involves using this interest to cover the annual interest on a $50 billion loan for Ukraine, sourced from international markets.

President Biden, at the summit in Puglia, Italy, reiterated that the $50 billion loan would support Ukraine and send a strong message to Russian President Vladimir Putin. Zelensky expressed gratitude for the continued support from the US and other allies, calling the security deal with the US the strongest since Ukraine’s independence in 1991. Other G7 leaders, including UK Prime Minister Rishi Sunak, praised the loan deal as transformative.

The $50 billion loan compares significantly with the $61 billion in US military aid agreed upon in May. A senior White House official noted the loan would support various needs, including military, budget, humanitarian, and reconstruction efforts. While the frozen funds’ interest is seen as a symbolic victory for Ukraine, some in Kyiv had hoped for the release of the entire $300 billion frozen fund. However, the European Central Bank opposed this, citing risks to international order.

The funds from the loan will not immediately impact the war, as they are expected later in the year. Ukraine continues to seek more immediate military aid, such as air defense systems and F-16 fighter jets, which could start arriving in the summer. Zelensky mentioned that the new security agreement includes US shipments of these aircraft.

The loan arrangement symbolizes a significant move where Russia’s frozen assets are repurposed to support Ukraine’s defense. Although this marks a turning point, it is unlikely to change Russia’s stance on the war. Most of the frozen Russian central bank assets are in Belgium, and international law prevents their direct confiscation for Ukraine’s benefit. Russia has condemned the West’s actions as criminal and has hinted at severe retaliatory measures. European investors have around €33 billion stuck in Russia, complicating the situation further.

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Eurozone cuts interest rate for first time in 5 years

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The European Union has become the second major economy this week to reduce its lending rate, indicating progress in addressing inflation. The European Central Bank (ECB) cut its main interest rate from a record high of 4% to 3.75%, following Canada’s decision to lower its official rate on Wednesday. This decision coincides with EU-wide elections, reflecting public discontent over living costs.

ECB President Christine Lagarde stated that the inflation outlook has significantly improved, allowing for the rate cut. However, she cautioned that inflation would likely remain above the 2% target “well into next year,” averaging 2.5% in 2024 and 2.2% in 2025. Lagarde emphasized that the ECB would maintain a restrictive interest rate policy as needed to achieve the 2% target, without committing to a specific rate trajectory.

Lindsay James, investment strategist at Quilter Investors, noted that the rate cut was anticipated but still a relief for European consumers and businesses. She mentioned that the ECB’s move precedes potential cuts by the Bank of England and the US Federal Reserve, providing needed economic stimulus.

Despite a slight increase in inflation in May to 2.6% from 2.4% in April, the ECB decided to reduce rates. This follows Canada’s reduction from 5% to 4.75% after their inflation fell to 2.7%. Sweden and Switzerland have also made similar rate cuts.

Lagarde provided a positive economic outlook for the eurozone but warned of challenges such as geopolitical tensions and climate-related risks that could impact growth. Katherine Neiss, chief European economist at PGIM, expressed confidence in further ECB rate cuts over the summer or autumn, potentially lowering eurozone rates to 3.5% or less by year-end. She cited sluggish economic recovery, slowing inflation, and easing wage growth as justification for additional cuts.

In the UK, speculation exists that the Bank of England might reduce rates as early as this month, with inflation down to 2.3% from its peak over 11% in late 2022. The International Monetary Fund recommended cutting UK rates from 5.25% to 3.5% by year-end. However, George Godber from Polar Capital suggested that the upcoming UK election could complicate the Bank’s rate decision on June 20, as political considerations might influence the outcome.

The US Federal Reserve is also expected to reduce rates soon, with the current US inflation rate at 3.4%. Godber predicted that the Fed would act before the November election.

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G7 leaders to discuss €30bn loan for Ukraine using Russian assets

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The G7 finance ministers are set to discuss whether Ukraine can receive an additional €30 billion loan from seized Russian assets totaling €270 billion. This proposal has sparked division within the G7, particularly between the US and Germany. While some advocate for full asset seizure, others, including Christine Lagarde, ECB president, raise legal and economic concerns.

The US and UK propose mobilizing the frozen assets to provide a substantial loan to Ukraine, with interest paid from the profits of the seized Russian assets. They argue this approach avoids the need for asset confiscation, which could disrupt the international legal order and financial stability.

Belgium, holding the largest share of Russia’s frozen assets within the G7, has already generated significant investment income from these assets. It has agreed to allocate a portion of this profit to a joint G7 fund for Ukraine.

Critics argue that using the assets as collateral for a loan effectively amounts to confiscation. However, some legal scholars suggest that under the doctrine of state countermeasures, seizure may be justified.

Overall, there is contention over whether to provide Ukraine with a substantial loan using the seized assets, with concerns about legal implications and potential repercussions for financial stability and international relations.

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