ECB minutes raised concerns about the risk of an exchange rate overshoot in the future

Analysts at Barclays offer their responses on ECB’s monetary policy meeting minutes published a day before, which highlighted the Governing Council’s concerns

Key Quotes:

“Overall, the discussion is in line with our view that underlying inflation remains on a moderate recovery trend and is unlikely to accelerate in the near term.

While the accounts acknowledge that the recent euro appreciation likely reflected changes in relative fundamentals, there were concerns about the risk of an exchange rate overshoot in the future. On forward guidance, it was suggested that the language on forward guidance should be changed, as waiting too long could lead to misalignment between the Governing Council's communication and the actual state of the economy, which could trigger pronounced volatility when communication would eventually have to shift.

Overall, we believe that the minutes remain consistent with our baseline view on monetary policy. We expect an extension of QE into 2018 but also a reduction of its monthly pace to €35-40bn in H1 18 (which we expect to be announced in September/October) and further reduced to €15-20bn in H2 18. In 2018, we also expect two 10bp hikes in the deposit rate, in Q2 18 and Q4 18. In other words, to support the very gradual recovery in inflation we expect both QE and negative deposit rates to still be in place throughout 2018, albeit at less accommodative levels than in 2017 given we expect inflation to also be closer to target.”

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