ECB Council Left Changes for June After Disagreeing on Risks

Updated on
  • Central bank publishes account of April 26-27 policy meeting
  • Policy makers urge for cautious communication of exit plans

European Central Bank policy makers pointed to June to revisit their policy stance after differing on how much the region’s economic outlook had improved.

At the next policy meeting on June 8, new staff projections and data will put officials “in a better position to take stock and reassess the sustainability of the recovery and the outlook for inflation,” an account of the Governing Council’s April 26-27 meeting showed. Back then, members were still divided on how to characterize growth risks even if they largely agreed these had improved, while the inflation outlook was subdued and could be prone to downward revisions.

“Some members considered that the risks to real gross domestic product could now be characterized as broadly balanced,” while “other members maintained that downside risks to growth still prevailed,” the account showed. “It was also remarked that a downward revision to the inflation outlook in the June 2017 Eurosystem staff macroeconomic projections could not be ruled out.”

The record published Thursday feeds into a rising debate over when the ECB might start discussing how to withdraw stimulus as the euro-area economy recovers. Many economists and investors have their attention fixed on the June meeting in Tallinn as an opportunity for the ECB to express more optimism on the economy. That would set the stage for eventually winding down its 2.3 trillion-euro ($2.6 trillion) bond-buying program, but with price pressures still subdued concrete actions may still be put off for months.

Toward Balance

After the apparent disagreements within the Governing Council, President Mario Draghi said at his subsequent press conference that overall, risks remain tilted to the downside, while they’re “moving toward a more balanced configuration.”

Officials broadly agreed that they needed “to keep the communication on the Governing Council’s monetary policy stance and its forward guidance unchanged, while conveying a more positive tone on the state of the euro-area economy.” They felt communication “should be adjusted in a very gradual and cautious manner as, at the current juncture, monetary and financial conditions were particularly sensitive to changes.”

Executive Board members Peter Praet and Vitor Constancio have emphasized that point in speeches since the April meeting, noting that any shift in the policy stance needs to be prepared carefully and implemented gradually. Their colleague Benoit Coeure expressed a slightly different point of view, arguing in an interview with Reuters on Thursday that adjusting communication too slowly carries risks.

“It’s the risk that our communication deviates from economic reality,” he said. “Too much gradualism in monetary policy bears the risk of larger market adjustments when the decision is eventually taken.”

Wage Growth

One of the factors that made officials unsure about their previously communicated outlook was weaker-than-expected wages. While the increase in employment was having “a lasting positive impact,” they said “the strong pick-up in wage growth assumed in the March 2017 projection baseline was uncertain.”

Policy makers argued that economic projections could thus turn out to be “overly optimistic” unless consumption was bolstered by lower savings to make up the impact of higher prices on real disable income. 

During the meeting, which took place before pro-European Emmanuel Macron prevailed over anti-euro populist Marine Le Pen in the second round of France’s presidential elections, officials remarked that there was only “limited evidence” that political uncertainty was having a negative effect on growth, the account showed.

“If you look closely, then at least for the euro area you can say that political risks, after the elections in France, have generally diminished, even if new risks could arise,” Bundesbank President Jens Weidmann said on Thursday. “What we see is that political risks are very pronounced, but at the same time economic uncertainty is currently very low, as well as volatility in financial markets.”

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