The European Central Bank (ECB) released its monetary policy meeting from the July 19 – 20 central bank meeting. The ECB left monetary policy and its bond purchase program at the July meeting.
While the ECB did not change its language on forward guidance, the meeting minutes showed that members deliberated on some points. The meeting minutes showed that officials were concerned that the euro might appreciate further and as a result decided to hold back from changing its forward guidance.
The meeting minutes showed that “a suggestion was made that some consideration be given to an incremental adjustment in the language on forward guidance.” The idea about tweaking the language came as officials noted that waiting for too long to change its forward guidance could potentially create a misalignment between the central bank and the markets. The risk of this was expected to create increased market volatility if the ECB tweaked its forward guidance at a later point.
The minutes showed that officials agreed that it would be paramount at this stage to avoid sending the signals that could be prone to misinterpretation, potentially leading to a premature reaction from the markets.
“Accordingly there was agreement among all members to retain all elements of forward guidance,” the minutes said.
The markets are expecting that the European Central Bank will announce another small cut to its sovereign bond purchase program. However, it is quite likely that any tightening of monetary policy will come only after the current QE program will run its course into the end of December 2017.
Some economists are hopeful that the next taper will likely begin no earlier than January 2018. In this aspect, the ECB’s meeting in September is likely to bring about some volatility as the markets align themselves to the ECB’s communication.
ECB officials flag concerns on exchange rate
The meeting minutes also revealed that central bank officials were concerned about the euro exchange rate appreciation this year.
“Concerns were expressed about the risk of the exchange rate overshooting in the future,” the meeting minutes showed. The common currency has posted a strong recovery this year. The rally was fuelled by speculative bets in the market that the European Central Bank would trim its quantitative easing purchases.
The optimistic outlook comes on the back of a broadly improving economic situation in the eurozone. This was further fueled by the fact that the initial geo-political risks at one point threatened to break up the eurozone. However, the election outcomes in both Netherlands and France helped to boost investor sentiment.
The ECB has been broadly in preference for a weaker exchange rate. However, other stronger economies such as Germany and Netherlands have been at odds with the ECB.
Earlier this year, the US President Donald Trump called out Germany for keeping the euro artificially low in order to gain a competitive trade advantage. Germany categorically denied the allegations.
It wasn’t so long ago that the EURUSD parity talk dominated the news wires. However, since the pickup in inflation and higher GDP forecasts from the Eurostat, and the ECB, the prospects for a brighter outlook are taking shape.
Inflation data released last week showed that the Eurozone’s inflation rose 1.3% in July, while core inflation rose 1.2% as initially reported in the flash inflation estimates. Consumer prices in the Eurozone slightly dipped a few months ago but managed to recover thereafter.
The ECB is currently still taking a cautious stand and could wait for more evidence about inflation expectations.
The above factors have been mostly responsible for the common currency’s appreciation against its peers. The euro has been up close to 11% against the US dollar and rallied 6.5% against the British pound this year.
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