ECB Minutes Raise Concerns Over Euro

 | Jan 15, 2021 10:56AM ET

It has been a relatively quiet week for the euro. Currently, EUR/USD is trading at 1.2124, down 0.25% on the day.

ECB Notes Low Inflation, High Exchange Rate

The ECB released the minutes of its December meeting on Thursday. The release did not shake up the euro, but could provide some insights as to what we can expect when the ECB holds its first policy meeting of the year next week.

Back in December, the ECB announced it would increase the Pandemic Emergency Purchase Programme (PEPP), by EUR 500 million. The minutes showed that there is a divergence of views on the PEPP within the ECB, as some members wanted a higher increase, while others were in favor of a lower amount. Bank members are paying more attention to the sharp appreciation of the euro against the U.S. dollar, especially its effect on inflation. The minutes stated;

“It was pointed out that the nominal effective exchange rate currently stood at an all-time high and that the recent appreciation could contribute significantly to the subdued inflation outlook.”

The ECB is growing more concerned that a stronger euro will weigh on inflation, at a time when inflation is already at very low levels due to the severe economic conditions as a result of COVID-19.

What can we expect at Thursday’s ECB policy meeting? The December minutes show that the ECB is concerned about low inflation and the rising euro, and that the issues are closely related. Despite these concerns, it is unlikely that the ECB will make any major moves at the upcoming meeting. If these problems worsen, namely the exchange rate gets higher and inflation falls, we could see the ECB take action, or at least communicate to the markets its intention to adjust monetary policy. It will be interesting to see if the January rate statement reiterates the central bank’s concerns with low inflation and the high value of the euro.

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