ECB Accounts: Euro depreciation could add to inflationary pressures

The accounts of the European Central Bank's (ECB) September policy meeting revealed on Thursday policymakers saw that euro depreciation could add to inflationary pressure for the euro area.

Key takeaways as summarized by Reuters

"Inflation was far too high and likely to stay above the governing council’s target for an extended period."

"Inflation expectations were still anchored and wage growth remained moderate, with little evidence of second-round effects."

"Risks surrounding the projected inflation path remained tilted to the upside over the entire projection horizon."

"The size of the upward revision in the staff inflation projection for 2024 was not seen as sufficiently large as to require a more aggressive response."

"Expected weakening in economic activity would not be sufficient to reduce inflation to a significant extent."

"A response that was too aggressive could also exacerbate a recession, with few benefits for inflation in the short term."

"Some members expressed a preference for increasing the key ecb interest rates by 50 basis points. while a 25 basis point increase was seen as clearly insufficient."

"Acting forcefully now could avoid the need to increase interest rates more sharply later."

"It was argued that policy would remain expansionary after a 75 basis point rate hike."

"A very large number of members expressed a preference for raising the key ECB interest rates by 75 basis points."

"Without a timely reduction in monetary policy accommodation, inflationary pressures resulting from a depreciation of the euro might increase."

"Acting forcefully now could avoid the need to increase interest rates more sharply later in the economic cycle when the economy was slowing."

"Expected decline in inflation towards the end of the projection horizon was therefore seen to be surrounded by a higher than usual degree of uncertainty."

Market reaction

EUR/USD edged slightly lower with the initial reaction and was last seen losing 0.1% on the day at 0.9875.