The European Central bank released the meeting minutes last week which covered the monetary policy meeting that was held in the last week of May. According the minutes, the ECB acknowledges slowdown in Eurozone growth and expects it to slow further amid increasing uncertainty. However, the minutes showed that officials were confident that the region’s solid broad based growth was still strong.
The revelations from the meeting minutes come as the central bank contemplates ending its quantitative easing program this year in September. Policy makers debate whether to wind up its massive bond purchase program or to continue to keep the stimulus for a longer period of time.
Risks come from the global trade factors as well as domestic issues surrounding slower pace of growth from Germany and France as well as political developments from Italy.
“Uncertainty surrounding the outlook had increased and caution was seen as warranted in interpreting recent developments, also because the moderation in growth appeared to be broad-based across countries and sectors,” the ECB meeting minutes showed.
The minutes said that a “pronounced weakening of demand” could be expected espcially on the external factors. The minutes conveyed the message that the ECB could be weighing its options in one of the upcoming monetary policy meetings.
The central bank said that all indicators, from GDP to the forward leading indicators such as the PMI’s were showing that growth had slowed in the first quarter.
While the meeting was held in late April, latest economic data from the Eurozone showed that this downward trend continued into April and May as well. The services and manufacturing PMI’s were seen easing back for the fourth consecutive month suggesting that the Eurozone growth might have slowed to a pace of 0.4% for the second quarter.
Policymakers however downplayed concerns that growth still remained robust and above the region’s potential. This was seen somewhat as an argument to justify the end to bond purchases in September 2018.
Still, concerns remain especially on inflation. The Eurozone core inflation rate has been steadily slipping below the 1.0% increase seen just a few months before. The slowdown in the inflation rate comes despite higher oil prices.
However, from a policy perspective, it is likely that the ECB could still wind up its quantitative easing program and only wait longer before the first rate hike. Previously, some of the hawkish members from the governing council said that rates could rise within nine months after the ECB ends its QE program.
New concerns emerge from the developments out of Italy. With the anti-EU parties forming a coalition, concerns remain that the newly formed Italian government could loosen fiscal policies including its poll promise of rolling back the pension reforms.
This could potentially put Italy head on for a collision course with Brussels. The market expectations are for a rate hike was pushed from April to June 2019 but overall, the expectation is that the ECB will end its bond purchases this year.
However, in somewhat of a contradiction to the ECB’s minutes, the ECB’s chief economists Peter Praet said last week that growth recovery was still “on track.”
“The economy is doing good but there are clouds — some say fog — but I see clouds,” Praet said. Praet was speaking at a business summit and said that the spike in the business confidence levels was somewhat unsustainable especially in the final quarter of last year. He said that some temporary factors were at play and expressed confidence that growth would soon return.
The euro currency did not react much to the dovish news as investors were more concerned about the developments from Italy and the currency was already pushed lower over the week.