ECB Monetary Policy Meeting Minutes Assure Inflation Commitment

It was a quiet start to the European session, with no economic indicators from the euro area for investors to consider. The lack of stats left ECB monetary policy chatter and the ECB meeting minutes in focus.

Ahead of the ECB minutes, ECB President Lagarde participated in the “Finding Europe’s New Growth” panel discussion at the World Economic Forum in Davos.

The ECB President reiterated previous commitments to bring inflation to target.

Lagarde reportedly said,

“We shall stay the course until such a time when we have moved into restrictive territory for long enough so that we can return inflation to 2% in a timely manner.”

The ECB President’s comments came off the back of a Bloomberg report on Tuesday that talked about policymakers considering a slower pace of interest rate hikes after February.

ECB Monetary Policy Meeting Minutes Threaten the Economic Outlook

However, the ECB monetary policy meeting minutes drew more interest. Mixed signaling this week left investors wanting clarity on what lies ahead.

Salient points from the December 14-15 meeting minutes included,

• Risks to the inflation outlook were primarily on the upside. Existing pipeline pressures could drive stronger-than-expected increases in retail prices for energy and food over the near term.
• Chief Economist Philip Lane noted that the expected path of the key ECB interest rates had a more pronounced hump shape in December than in the October survey.
• Interest rates would still have to rise significantly at a steady pace to reach levels sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.
• Members broadly agreed that the euro area economy would likely contract in Q4 2022 and Q1 2023. Members attribute the outlook to the energy crisis, high uncertainty, weakening global economic activity, and tighter financial conditions.
• Despite the negative outlook, Eurosystem staff projected a relatively short-lived and shallow recession.
• While Eurosystem staff downwardly revised their economic growth forecast for 2023, ECB members noted stronger-than-expected economic resilience.
• Importantly, the labor market remained strong, supporting domestic demand. However, there is uncertainty over the effects of tighter monetary policy on consumption.
• Also, risks to the economy remain tilted to the downside in the near term. The war in Ukraine and energy and food costs continued to present downside risks.
• Higher wages raised concerns, with members noting the tight labor market conditions were creating second-round effects.

The minutes also revealed that many ECB members favored a 75-basis point interest rate hike.

For the Euro area, more aggressive policy moves to bring inflation to target could negatively impact the economy. With inflation too high and ECB members eager to return inflation to target, the balancing act will likely continue.

EUR/USD Price Action

Before the release of the minutes, the EUR/USD responded to Lagarde’s comments. Recovering from an early low of $1.07822, the EUR/USD rose to a current-day high of $1.08385 before easing back.

In response to the policy meeting minutes, the EUR/USD rose to a post-release high of $1.08272 before falling to a low of $1.08058.

At the time of writing, the EUR/USD was up 0.11% to $1.08067.

Up Next

It is a busy US economic calendar, with housing sector data, jobless claims, and the Philly Fed Manufacturing Index in the spotlight. Barring dire housing sector numbers, the Philly Fed Manufacturing Index and jobless claims will likely have more influence.

A sharp rise in the Philly Fed Manufacturing Index and a fall in initial jobless claims would weigh on the EUR/USD.

Beyond the economic indicators, investors should continue monitoring FOMC member commentary. Hawkish chatter would weigh on riskier assets and test support for the EUR/USD.