European Central Bank could revisit its monetary policy 'early this year,' minutes reveal

Key Points
  • The ECB is reluctant in changing its monetary stance, even if there are stronger inflation expectations, the minutes shows
  • The minutes showed that the ECB could revisit its monetary policy "early this year" but the bank considered that it was too early to do so last month.
Mario Draghi, president of the European Central Bank (ECB), right, and Vitor Constancio, vice president of the European Central Bank (ECB), make notes during a news conference
Ralph Orlowski | Bloomberg | Getty Images

The euro rose to a day's high on Thursday shortly after the European Central Bank (ECB) released minutes of its January meeting.

The currency hit $1.23085 at around 12:30 p.m. London time (7:30 a.m. ET) but it eased some of that strength a few minutes later.

ECB minutes showed that inflation, the most important economic indicator at the central bank, is picking up at a faster pace. As a result, some market participants briefly interpreted that as an indicator that monetary stimulus will come to an end earlier than previously thought.

"Inflation expectations in the ECB Survey of Professional Forecasters (SPF) for the first quarter of 2018 showed average inflation expectations of 1.5 percent, 1.7 percent and 1.8 percent for 2018, 2019 and 2020 respectively. Compared with the previous survey round, this represented upward revisions of 0.1 percentage point for 2018 and 2019," the minutes read.

"Longer-term market-based measures of inflation expectations had increased further, in line with the gradual upward trend observed since the middle of 2017."

In this context, the minutes showed that the ECB could revisit its monetary policy "early this year" but the bank considered that it was too early to do so last month.

"The language pertaining to the monetary policy stance could be revisited early this year as part of the regular reassessment at the forthcoming monetary policy meetings... However, it was concluded that such an adjustment was premature and not yet justified by the stronger confidence," the bank said in the minutes.

Euro under the radar

ECB President Mario Draghi told markets in January that the exchange rate was a "source of uncertainty."

The euro, which in the aftermath of January's meeting rose to a new three-year high, started the year surging against other currencies, including the U.S. dollar, as the region's economy improved and political risks dissipated.

However, a stronger euro could hurt European exports and affect inflation in the euro zone — which the central bank has tried to support in the last few years — potentially prompting a change in its policy.

"There was broad agreement among members to convey the Governing Council's concerns about the recent volatility in the euro exchange rate, which represented a source of uncertainty that had to be monitored with respect to its implications for the medium-term outlook for price stability," the minutes said.

"In this context, it was also seen as important to reaffirm the agreed G7 and G20 exchange rate language, which entailed the commitment to market-determined exchange rates and refraining from targeting them for competitive purposes,."

In January, the U.S dollar dropped to a three-year low, and saw its biggest one-day drop in 10 months, after U.S. Treasury Secretary Steven Mnuchin said a weak dollar is good for the U.S.