ECB reveals it wanted to strike balance on rate-rise guidance
EUROPEAN Central Bank officials wanted to balance precision with latitude when they offered investors new guidance on when interest rates could begin to rise.
At their meeting in June, a milestone event dominated by an announcement that net asset purchases would end this year, policymakers also said that borrowing costs would remain at record lows at least through the summer of 2019.
In the account of that gathering, the governing council said that was a “good balance between providing sufficiently precise guidance and maintaining adequate flexibility”.
While summer 2019 is still a year away and there’s any number of events that could change the outlook, economists and market participants have tried to translate the ECB’s vague language into a specific point in time. Bloomberg reported last week that some policymakers were unhappy with investors’ perception that the first hike would come only at the end of 2019.
In their view, a move in September or October next year is more likely on the cards.
The governing council’s broad aim at the June meeting was to reiterate their policy would remain accommodative, using a slightly more dovish stance on rates – investors had expected a first hike in the middle of the year before the meeting – to cushion the impact of expiring bond buying.
“As remaining uncertainties surrounding the inflation outlook still called for caution, it was widely felt that monetary policy had to remain patient, prudent and persistent,” the ECB said in the account published yesterday.
“It was argued that credible and effective forward guidance should be provided on the use of the remaining policy instruments.”
The euro was little changed after the report and traded at $1.1677 at 3:22pm Frankfurt time.
The summary of the meeting also showed that officials were keeping a close eye on market developments to avoid negative surprises.
Announcing the end of net purchases was “widely regarded as following the gradual and predictable pattern of past recalibrations of the monetary-policy stance”.
A reference was made that the ECB’s signature longer-term loans have contributed “notably” to credit growth, exceeding initial expectations “somewhat”.
Other economic data have also started to recover after repeatedly missing forecasts since the start of the year. Still, concerns over a trade spat between the US and China – the world’s two biggest economies – have weighed on investor confidence in both Germany and the euro area.
Policy makers expressed concern that this could lead to a general decline in sentiment and saw risks to global growth on downside, according to the account.
ECB President Mario Draghi urged governments earlier this week to push back against rising protectionism, which he singled out as the main risk for the region’s economic expansion. (Bloomberg)