ECB Monetary Policy Meeting Minutes Deliver No Surprises

It was a relatively quiet day on the Eurozone economic calendar. On the data front, the German Ifo Business Climate Index drew interest ahead of the ECB monetary policy meeting minutes.

What Did ECB Monetary Policy Meeting Minutes Reveal?

There were no surprises today. ECB members view inflation as too high and see inflation staying above target for an extended time.

However, the ECB also noted that there were no visible signs of widespread second-round effects, and longer-term inflation expectations remained broader aligned with the 2% target.

Nonetheless, risks to the inflation outlook were on the upside; Inflation could see a further pickup over the medium term.

Amidst persistent inflation, economic activity likely slowed in Q3, and the ECB expects economic conditions to deteriorate further over the remainder of 2022 and early 2023. There are clear downside risks to growth in Q4 2022 and Q1 2023, compared with September 2022 projections.

However, the minutes made no reference to another 75-basis point rate hike in December. The minutes showed that the future path should be based on the ‘evolving outlook for inflation and the economy, following a meeting-by-meeting approach.’

Members argued that the Governing Council should continue normalizing and tightening monetary policy in the case of a shallow recession but pause in the event of a prolonged and deep recession.

The minutes reflected the ECB’s stance on tackling inflation, saying,

“The ECB now needed to show equal determination when inflation was above the target, countering far too high inflation and preventing it from becoming entrenched, irrespective of a deteriorating outlook for economic activity.”

Concerning the December meeting, the minutes noted that the Governing Council would have more information available, with projections extending to 2025.

In the October ECB Press Conference, ECB President Christine Lagarde noted that the ECB would be able to look ahead once the staff projections were available in December.

How Did the EUR Respond to the Minutes?

The EUR/USD responded positively to the minutes, recovering from a pre-release low of $1.03818 to a post-release high of $1.04144. A willingness to stomach a shallow recession and determination to push ahead with normalization and tightening delivered support.

At the time of writing, the EUR/USD was up 0.13% to $1.04084.

Earlier in the day, German business sentiment figures surprised to the upside.

How Did the Ifo Business Climate Index Compare with the PMI Survey?

Germany’s Ifo Business Climate Index increased from 84.5 to 86.3 in November. Economists forecast a more modest rise to 85.0.

According to the November survey,

• Pessimism regarding the coming months reduced markedly, suggesting that the German recession could be less severe.
• On Wednesday, the prelim November Composite PMI survey revealed a similar trend. The level of pessimism continued to improve from a September low.

As with the Markit survey, sentiment towards current conditions was dire. The Ifo Current Assessment Sub-Index fell from 94.2 to 93.1. The Markit survey highlighted widespread concern about the effects of high inflation, rising interest rates, and heightened levels of uncertainty on investments and economic conditions.

The pickup in business sentiment could incentivize the ECB to continue hiking rates to bring inflation to target. The EUR/USD responded positively to the numbers.