MNI POLICY: ECB Accounts Show Eurozone Recovery Doubts

By Luke Heighton

     FRANKFURT (MNI) - Doubts over any eurozone recovery in 2019, slowing global

activity and persistent uncertainties dominated discussion during the ECB's

Governing Council July rate-setting meeting.

     Here are key points from the official Account:

     --Despite easing financial conditions since June, Chief Economist Philip

Lane said softening global growth and weak international trade dynamics were

weighing on the euro area outlook. The Governing Council should underline the

need for a highly accommodative monetary policy "for a prolonged period of

time," as both real and projected inflation rates have "been persistently below

levels that were in line with its aim."

     --Lane proposed that forward guidance be adjusted by "reintroducing an

easing bias," and that committees should examine "ways to strengthen the forward

guidance on policy rates, mitigating measures, such as the design of a tiered

system for reserve remuneration, and the modalities of potential new asset

purchases."

     --Members "broadly supported" Lane's analysis and policy proposals,

referring also to "ongoing uncertainties related to trade tensions, the United

Kingdom's withdrawal from the EU and the rotation in the Chinese growth model

from manufacturing investment towards consumption."

     --"Some nuances were expressed about the design and individual elements of

a possible policy package, which was presented as a list of options [...]

However, the view was expressed that the various options should be seen as a

package, ie, a combination of instruments with significant complementarities and

synergies, since experience had shown that a policy package - such as a

combination of rate cuts and asset purchases - was more effective than a

sequence of selective options."

     --Members also "saw value" in examining ways to further strengthen forward

guidance, announcing preparatory work on the design of a tiered system "or other

options" to mitigate the effects of negative rates on banks, alongside studies

the nature of potential new asset purchases. But "some concerns were raised

regarding possible unintended consequences of tiered system and its ability to

fully mitigate the potential effects of negative policy rates on bank

intermediation."

     --Incoming data was "broadly consistent" with June's staff projections, and

there was an "increased likelihood that the "soft-patch" that had emerged last

year would be more protracted than previously anticipated, raising "more general

doubts regarding the expected recovery in the second half of [this] year." This

was "worrying," yet reference was also made to unchanged positive fundamentals

such as favourable financing conditions, income growth, employment gains and

rising wages.

     --"There was broad agreement that it was sensible to collect more

information and await the September ECB staff projections for a thorough review

of the outlook." Yet members "widely stressed" the dichotomy between weak

manufacturing activity and generally resilient activity in the services and

construction sectors, in conjunction with a dichotomy between weaker export

growth and more resilient consumption and residential investment growth.

"Concern was expressed that such dichotomies could not last forever and that

sooner or later there might be spillovers or contagion from the weakening of

manufacturing."

     --"Members noted the support for economic activity coming from the mildly

expansionary euro area fiscal stance." However, "the contingency of a

significant further deterioration in euro area activity would call for fiscal

policy to assume a more prominent role in sustaining demand."

     --Members "widely shared the view" that the recent declines in longer-term

inflation expectations were a "matter of concern, which warranted close

monitoring," given that they were no longer confined to market-based indicators

but were now visible in survey-based indicators.

     --Confirming the symmetry of the ECB's inflation aim was seen as "an

important element to bolster the achievement of a sustained adjustment to its

aim." "A remark was made that so far the interaction between the inflation aim

and the Governing Council's definition of price stability as an inflation rate

of 2% introduced, de facto, an element of symmetry."

     --"A view was put forward that a discussion of symmetry around the

inflation aim could not be separated from a discussion about the level of this

aim, while the point was made that any future change in the inflation aim should

not be employed as an isolated policy measure but should be linked to a broader

review of the ECB's monetary policy strategy." At the same time, "the point was

made that that a clarification of the symmetric nature of the Governing

Council's "reaction function" would not pre-empt a full review of the monetary

policy strategy."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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