ECB July meeting minutes show caution over weak inflation, concern about euro strength

ECB on inflationECB

The minutes of the ECB’s July meeting published on Thursday reflect the central bank’s concern about the strength of the euro, but also a degree of caution regarding continued weak inflation data, analysts say.

Renta 4 experts highlight that the central bank made reference to the European economy’s recent performance “which is not having any substantial impact on inflation.”  According to a second estimate released by Eurostat yesterday, Eurozone inflation stood at 1.3% in July year-on-year, on a par with the June reading, and the lowest level for the year so far. The ECB’s inflation target is 2%.

Focus will now be on the ECB’s inflation outlook, due in September, Renta 4 says. With regard to other comments from the central bank on the economy, they note that:

“The recovery is solid, with decreasing risks and increasingly less dependance on monetary stimulus. It’s expected that in the autumn we will have a date for the start of the withdrawal of these stimuli.”

For Link Securites, the most interesting aspect of the minutes was “the ‘fear’ expressed by some board members that the euro’s strength might end up harming the economic recovery, with a negative impact on inflation expectations for the region.”

The speed and extent of the euro’s appreciation has come as a surprise, Deutsche Asset Management analysts say. They explain:

“For sure, the outcome of the French elections was a big relief for financial markets. Furthermore, the Eurozone economy turned out to be in better shape than previously thought.”

“On the other hand, interest rates in the U.S. remain at a substantially higher level than in the Eurozone. Nevertheless, we believe that the dynamics between the “Greenback” and other currencies like the euro have changed over the past months.”

BoA Merrill Lynch experts agree that the ECB minutes show “more nervousness about the latest FX developments than Draghi’s guarded comments during the July press conference.”

“The dovish tone reflects uncertainty but also limited room for a policy response. We continue to expect an October announcement that purchases will be scaled back to 40 billion euros from Jan-June 2018, and end in Dec 2018,” BoA Merrill Lynch adds.