ECB meeting minutes paint a dovish picture

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The European Central Bank released its monetary policy meeting minutes last week for the meeting that was held earlier in March this year. Policymakers expressed concerns on the risks of a full fledged trade war against the United States and also showed concern on the rising exchange rate.

The ECB’s meeting minutes covered the monetary policy meeting held earlier in March. The central bank had left interest rates unchanged along with the QE program at 30 billion euro a month. The ECB had however changed the language in its monetary policy statement as it removed the dovish references to monetary policy.

The eurozone economy which has been growing steadily over the past few years saw policy makers debating on how to slowly cut back on the QE program which has helped the economy to rebound. The markets speculate that the ECB’s next policy action will be towards policy tightening.

At the monetary policy meeting held in March, the central bank gave up its pledge to raise asset purchases if needed. This was however seen mostly as a symbolic move on its part as the central bank remains on track to end its current QE program.

The euro’s exchange rate which has firmed in recent years was also another concern for policy makers alongside the trade uncertainty unleashed by the Trump administration.

“It was remarked that the recent movements in the euro exchange rate seemed to relate more to the relative monetary policy shocks, including communication, and less to improvements in the macroeconomic outlook,” the minutes showed.

The ECB’s minutes showed that policy makers were wary of the potential impact of such trade wars, calling it a significant source of uncertainty.

“There was widespread concern that the risk of trade conflicts, which could be expected to have an adverse impact on activity for all countries involved, had increased,” the minutes showed.

In a way, the ECB’s minutes echoed similar views from other central banks including the Federal Reserve. The Fed’s meeting minutes released the day before also saw policy makers citing trade uncertainty as a downside risk to monetary policy.

The impact of a rising exchange rate of the euro currency is expected to slowdown the pace of inflation increase. The eurozone’s consumer prices have been largely stable in recent months although showing signs of easing in the early months. The most recent consumer price index data showed that core CPI was rising 1.1% on the year. This is still a far cry from the ECB’s target of achieving price stability at 2% inflation rate.

Most recently, economic data from the first quarter also showed that the momentum in the economic activity also eased. German trade balance figures showed a large decline in both exports and imports, while business sentiment surveys showed that both businesses and consumers were cautious in the near term outlook.

The minutes also showed that on the unemployment side, with a significant amount of slack being absorbed, the only way was to wean the Eurozone economy away from the monetary policy program and towards normalization.

The ECB’s statement in March showed that the increase in the confidence in the economic growth warranted a gradual adjustment to the forward guidance from the central bank.

The euro currency was seen trading strongly prior to the ECB’s meeting minutes release but soon gave up the gains after investors viewed the central bank’s minutes as dovish. The meeting minutes comes two weeks ahead of the next monetary policy meeting due to be held in the later part of April.

No changes are expected at the next meeting, but speculation is rife that the central bank might further cut back on its bond purchases by the middle of the year.


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