- European central bank releases meeting minutes from March monetary policy meeting
- Minutes show that there is an increasing consensus among officials that the economic outlook is improving
- Despite the shift in the outlook, most officials are wary of sending the wrong tightening conditions prematurely
- March meeting minutes suggest that a continued recovery over the next few months could bring more confidence among ECB officials to strike a hawkish tone
European Central Bank Meeting Minutes
European central bank officials aired their difference of opinion on the strength of the recovery in the Eurozone economy with some suggesting that the central bank must start to rein in the bank’s balance sheet, meeting minutes from the March ECB meeting showed last week.
Central bank officials were, however, optimistic that the economy might be improving but were wary of sending the wrong signals about tightening conditions that could potentially backfire.
The meeting minutes showed that most officials agreed that the economic risks were to be characterized as being “broadly balanced” but some members pointed out that there were still significant downside risks to the economy.
ECB officials continue to remain divided on policy
There were, however, some dissenters within the ECB’s governing council, with the minutes revealing that there was at least one member that suggested that the central bank should drop its pledge to boost stimulus again if the outlook deteriorated.
But other members suggested that such a measure was not necessary with the pledge eventually left unchanged in March as officials believed that changing the message would send the wrong signal to the market.
ECB officials have been caught with mixed signals from the economy. While inflation data in the first two months of the year showed acceleration towards the ECB’s inflation target of 2%, subsequent data suggested a pullback to the strong pace of increase registered previously.
— CentralBanking.com (@CentralBanking_) April 7, 2017
As evidence mounts on the tepid pace of recovery in the eurozone economy, the central bank is at an interesting policy juncture.
Officials said that a nuanced shift in communication was necessary to send a more positive tone to the markets even if it meant having to keep a substantial degree of accommodation in order to keep inflation to reach the target, the meeting minutes showed.
The central bank had maintained a neutral tone at its recently concluded meeting in March. However, the communication was interpreted as being hawkish by market participants when the ECB president Mario Draghi suggested that the downside risks were fading.
The markets interpreted the comments as hawkish as participants began to speculate on the timing of a rate hike from the ECB. A few weeks ago, reports from various top financial news outlets showed that some ECB officials were concerned about sending the wrong message to the markets.
The minutes also showed that officials agreed that the current policy mix was the most appropriate given the “unaltered outlook” for inflation in the medium term.
In conclusion, the European central bank’s March meeting minutes showed that officials continued to debate on the sending the right policy message to the markets, but were also wary of sounding too hawkish ahead of time.
The main take away from the March meeting was that the majority of policy makers urged patience and to maintain a steady policy outlook for the near term.
It is quite likely that with the political headwinds from France and Germany over the coming months, the ECB is likely to buy more time and keep the monetary policy as is. Meanwhile, any evidence of improvement in the eurozone’s outlook could potentially trigger a shift in the policy message towards the fourth quarter of the year.