ECB Foresaw Unpredictable Economic Spillovers Before Brexit Vote

  • Central bank publishes account of June 2 policy meeting
  • Governing Council discussed constraints on asset purchases

European Central Bank policy makers estimated in June that the recovery in the 19-nation euro area would proceed at a “moderate but steady pace,” though subject to “difficult to anticipate” risks from the U.K.’s vote on leaving the European Union.

Policy makers were in “general agreement” that the referendum “was an important source of uncertainty as regards the economic outlook,” and in the event that the U.K. voted to quit the political bloc there could be significant “negative spillovers to the euro area via a number of channels, including trade and the financial markets,” according to an account of the June 2 Governing Council meeting published on Thursday.

The decision to end the U.K.’s four-decade membership of the EU sent the pound and asset prices tumbling and prompted Executive Board member Peter Praet to warn last week that it could partly reverse the recent improvements in investment and consumption in the euro area. Policy makers noted that as of the end of May, the risk of a leave vote had appeared to be abating.

Officials also acknowledged the concerns that its asset-purchase program could face implementation challenges over time. The accounts noted that “a remark was made that markets appeared to foresee future challenges in sourcing sufficient volumes of public bonds for some jurisdictions under present limits, which could contribute to increased price volatility.”

Staff Forecasts

At the same time policy makers said that with purchases could be made “via close substitutes across markets” and if they were indeed close substitutes “it should not matter much which precise assets were being purchased under the APP, but rather the overall purchase volume and associated money creation.”

Stimulus measures including a bank-lending program and corporate bond purchases announced in March may not have been fully integrated into June staff forecasts for growth and inflation, policy makers noted. Those projections estimated that inflation will rise to average 1.6 percent by 2018, short of the target of just under two percent.

“Additional stimulus was expected from the measures still to be implemented, beyond the impetus already taken into account,” the officials agreed. “Both TLTRO II and the CSPP were seen as important measures that could be expected to impact the real economy directly.”

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