ECB Toyed With Changing Forward Guidance, Worried by Euro Strength -- 3rd Update
August 17 2017 - 9:26AM
Dow Jones News
By Todd Buell
FRANKFURT--The European Central Bank was worried in July that
the euro might become too strong and decided against a change to
its forward guidance that could have driven the currency higher,
the accounts of its latest meeting showed Thursday.
"Concerns were expressed about the risk of the exchange rate
overshooting in the future," the minutes of the July 19-20 meeting
said.
A fall in the euro against the dollar accelerated when the
minutes were released, with the common currency down 0.9% on the
day before regaining some ground.
"A suggestion was made that some consideration be given to an
incremental adjustment in the language on forward guidance," the
minutes said.
This was based on the notion that waiting too long to tweak
guidance could create a "misalignment" between the ECB's
communication and its assessment of the economy, which could bring
about increased market volatility when the communication eventually
changed.
The Council ultimately rejected this idea as, "it was generally
judged paramount at this stage to avoid sending signals that could
be prone to over-interpretation and might prove premature."
"Accordingly there was agreement among all members to retain all
elements of forward guidance," the minutes said.
The minutes depicted a central bank that doesn't want to pull
the plug too soon on its large bond-buying program, especially as
inflation isn't yet at its target of just below 2% in the medium
term.
Analysts said the records showed the ECB remained committed to a
gradual ending of stimulus but wasn't quite sure how to go about
it.
"Tapering will come, but somehow the ECB itself does not yet
entirely know when and how to do it," said ING economist Carsten
Brzeski.
Mr. Brzeski said he expected the ECB to take another "baby step"
toward ending quantitative easing at its next meeting on Sept.
7.
"This could be done by putting more emphasis on the strong
economic recovery--which easily could do with somewhat less
monetary stimulus--and/or by using the well-known key phrase, that
'the Governing Council has tasked the relevant committees to
investigate several options for QE in 2018,'" he said.
The ECB's forward guidance indicates it expects interest rates
to remain at current levels for an extended period and well beyond
the term of its net asset purchases. It currently purchases assets
worth EUR60 billion ($71 billion) each month and is due to continue
at that pace until at least the end of 2017. The ECB also
explicitly reserves the option of increasing or extending the
program should economic or financial conditions worsen.
"The case was made for proceeding gradually and prudently when
approaching adjustments in the monetary policy stance and
communication, in line with the Governing Council's evolving
assessment," the minutes said.
The minutes showed that council members felt inflationary
pressure remained below acceptable levels. "Members generally
agreed that, from the present perspective, the available evidence
continued to indicate that convincing progress on a durable and
self-sustaining convergence of inflation to the Governing Council's
medium-term inflation aim had still to be secured."
At its July meeting, the ECB decided to delay a discussion about
whether to taper off its bond-buying scheme. The decision came amid
still-weak inflationary pressure, despite robust economic
growth.
The European Union's statistics office confirmed Thursday its
initial estimate for July inflation of only 1.3%. The most recent
ECB staff forecasts, issued in June, show average inflation at 1.5%
in 2017 and only hitting 1.6% in 2019. The ECB is due to issue new
forecasts in September.
Mr. Draghi said in July that the ECB would have a discussion
about the future of QE in the fall. Investors will also listen very
closely to remarks the ECB president is due to make next Friday at
the Kansas City Federal Reserve's annual conference in Jackson
Hole, Wyoming.
"The minutes of the ECB's July policy meeting suggest that there
will be no fireworks from President Draghi in his Jackson Hole
speech next week, " Jessica Hinds of Capital Economics said.
The ECB's struggle to manage monetary policy amid strong growth
and weak inflation is echoed in the U.S. Minutes of the most recent
Fed policy meeting published Wednesday showed growing concern that
weak inflation could signal a fundamental change in the economy,
suggesting a need to refrain from additional rate increases.
Write to Todd Buell at todd.buell@wsj.com
(END) Dow Jones Newswires
August 17, 2017 09:11 ET (13:11 GMT)
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