ECB Toyed With Changing Forward Guidance, Worried by Euro Strength -- 2nd Update
August 17 2017 - 8:48AM
Dow Jones News
By Todd Buell
FRANKFURT---The European Central Bank considered updating its
forward guidance last month and expressed concern about the euro
becoming too strong, the accounts of its latest Governing Council
meeting showed Thursday.
"While it was remarked that the appreciation of the euro to date
could be seen in part as reflecting changes in relative
fundamentals in the euro area vis-à-vis the rest of the world,
concerns were expressed about the risk of the exchange rate
overshooting in the future," the minutes of the July 19-20 meeting
said.
The Council also toyed with making a slight change to its
forward guidance, but decided not to out of caution.
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 ECB's forward guidance says the central bank 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 minutes painted the picture of 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.
"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 quantitative easing 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 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 08:33 ET (12:33 GMT)
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