ECB Meeting Minutes Confirm Fears Over Downside Risks

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The release of the December ECB meeting minutes last week confirmed that the central bank is comfortable with its current monetary policy situation.

The minutes were closely watched following the ECB’s warning during the December meeting that risks are now” tilted to the downside”.

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Draghi said that although policymakers judged risks to be “broadly balanced”, the balance had shifted recently and “was moving to the downside”.

Indeed, Draghi even added that these downside risks “made the appropriate extent and timing of future policy firming less clear than earlier.” With this in mind, traders were carefully scrutinising the minutes for any signs that the ECB might be open to renewing its easing stance this year if these downside risks develop further.

Notes from the minutes

Ultimately, there as very little in the way of actual discussion regarding the prospect of new easing measures. The minutes reaffirmed the “Governing Council’s readiness to adjust all of its instruments, as appropriate, to ensure that inflation continued to move towards the Governing Council’s inflation aim in a sustained manner.”

On this note, the minutes added that “linking the reinvestment horizon to the interest rate “lift-off” signalled that the forward guidance on the key ECB interest rates was the Governing Council’s primary tool for adjusting the monetary policy stance.”

ECB To Revisit Longer-Term Refinancing Operations

Although the prospect of new liquidity operations wasn’t discussed explicitly, the minutes do support the likelihood of this happening eventually, saying:

“Looking ahead, the suggestion was made to revisit the contribution of targeted longer-term refinancing operations to the monetary policy stance,”

Adding that “monetary policy needed to remain prudent, patient and persistent and to continue to be data-driven in the period ahead.”

While the ECB’s growth outlook, shown in the updated ECB staff forecasts, is very optimistic, this is clearly juxtaposed with the downside risks the bank has highlighted.

Commenting on these downside risks, the minutes read:

“The balance of risks was moving to the downside, owing to the persistent prominence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.”

Inflation On Course To Hit Target

Despite these risks, the ECB remains confident that higher wage growth in the Eurozone will feed into higher core inflation, bringing it back up to the bank’s 2% target. On this matter, the minutes read:

“Measures of underlying inflation remained generally muted, but domestic cost pressures were continuing to strengthen amid high levels of capacity utilisation, tightening labour markets and rising wages.”

Finally, the minutes noted:

“The pick-up in wage growth had also become broader-based across different Euro-area countries and sectors of the economy,”


“Wage developments were fairly dynamic in a number of Euro-area countries from a historical perspective.”

Technical Perspective

Price action in EURUSD remains fairly un-exciting for now. While price has broken out above the longer term bearish channel, it is still constrained within the short term bullish channel.

This, for now, means a potential bear flag scenario is still in play, keeping the risk of an eventual downside break alive unless we see some proper momentum to the topside.  In terms of resistance, 1.1570 is the key local level while the 1.1798 level is the main level price needs to break in order to confirm a bullish shift.

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