Market backlash, euro surge worried ECB, minutes show
European Central Bank policymakers were wary last month of an excessive rise in the euro undoing the favourable financing conditions their easy policy stance has created, minutes of their July meeting showed on Thursday.
A bounce in the euro, which is making euro zone exports less attractive and imports cheaper, has been singled out by investors as a key threat to inflation, set to undershoot the ECB`s target of almost 2 percent at least through 2019.
The euro, for example, has gained 6.3 percent against the basket of currencies watched by the ECB as a measure of its broader strength since the first half of April.
The ECB minutes for the July meeting lay bare policymakers` nerves about this after a hint at policy changes by ECB President Mario Draghi in June sent the euro and euro zone bond yields rising, undoing some of the ECB`s work in depressing borrowing costs.
They showed that rate-setters were highly aware of this risk as they decided against any change to their pledge for continued monetary stimulus, worried that even the slightest tweak in their language could be overinterpreted and unsettle markets.
"Concerns were expressed about a possible overshooting in the repricing by financial markets, notably the foreign exchange markets, in the future," the ECB said in the minutes.
But policymakers also noted that the market moves so far mostly reflected improved economic conditions and the currency`s bloc`s improved resilience.
At 1.3 percent, both headline and underlying inflation are still far from the ECB`s target, a dilemma for policymakers given that growth -- at 2.2 percent in the second quarter -- is at its best rate since early 2011.
The economy of the 19-member currency bloc has expanded for 17 straight quarters and unemployment is dropping faster than expected.
One participant at the July meeting argued the euro zone`s economic recovery was becoming increasingly "self-sustaining" and less reliant on ECB stimulus, an argument to start tightening policy.
Yet wages and prices are barely responding, forcing the ECB to keep money taps wide open even as growth is now far above what is considered its potential without stimulus.
"It was underlined that the still favourable financing conditions could not be taken for granted," the ECB added.
"Caution was expressed that, in the present financial market environment, markets were particularly sensitive to incoming information."
Rate setters acknowledged "some tentative signs of a pick up" in underlying inflation, which excludes the more volatile food and energy prices, but did not see "conclusive evidence" of a sustained rise.
The euro weakened slightly on the minutes and traded down over half a percent on the day while German 10-year yields were down a touch.LONE HAWK
They emphasised markets were sensitive to new information and batted back a suggestion to adjust the ECB`s guidance, which includes a pledge to increase bond purchases from their current 60-billion-euros monthly pace if needed, out of fear of a market backlash.
"It was generally judged paramount at this stage to avoid sending signals that could be prone to over-interpretation and might prove premature," the ECB said.
Investors are impatient to find out what the ECB plans to do with its 2.3 trillion euros bond-buying programme, scheduled to run until December and widely expected to be gradually wound down next year.
But ECB policymakers meeting in July said the duration and pace of the purchases were not the only available levers to adjust their stance and "more policy space" was needed "in either direction" if needed.
(This article has not been edited by Zeebiz editorial team and is auto-generated from an agency feed.)