TEXT: Account of Minutes of ECB Sep 13 Governing Council Meet

     LONDON (MNI) - Account of the monetary policy meeting of the Governing

Council of the European Central Bank, held in Frankfurt am Main on Wednesday and

Thursday, 12-13 September 2018

     Full text can be found here:  goo.gl/MuaViY

1. Review of financial, economic and monetary developments and policy options

Financial market developments

Mr Coeure reviewed the latest financial market developments since the Governing

Council's previous monetary policy meeting on 25-26 July 2018.

     Heightened volatility had been observed in the currencies of some emerging

market economies, especially Argentina and Turkey, but also Brazil and South

Africa. In fixed income markets, Argentina's and Turkey's sovereign bond spreads

had widened proportionately more than those of other emerging markets, with only

limited signs of spillovers.

     In advanced economies, the euro/US dollar exchange rate had exhibited some

volatility, with the euro first falling to its lowest level in more than a year

after the Governing Council's July monetary policy meeting, only to reverse most

of this movement thereafter. From around mid-April, and increasingly since

mid-June, there had been a reduction in net long speculative positions in euro

to broadly neutral levels, which might have contributed to amplifying movements

in the euro/US dollar exchange rate.

     Turning to bond markets in the United States, domestic demand and monetary

policy could be expected to continue putting upward pressure on the ten-year

government bond yield. At the same time, increasing global risk and safe haven

flows into US Treasuries had likely exerted downward pressure on yields, which

roughly offset the upward pressure. Similarly, global risk aversion had likely

amplified the upward pressure on the US dollar, exerted as a result of improved

economic prospects and tighter monetary policy in the United States.

     In the euro area bond markets, prices in the Italian sovereign bond market

had been quite volatile over the previous few weeks. Of late there had been some

stabilisation, but at notably higher levels than prior to the formation of the

new Italian government. Spillovers from the Italian sovereign bond market to the

rest of the European bond markets had, however, been very limited.

     In equity markets, the EURO STOXX 50 index had fallen by around 5% since

the Governing Council's July monetary policy meeting and was down by more than

10% from its peak in January 2018. One of the drivers of this decline had been

European banks, as evidenced by the underperformance of the EURO STOXX Banks

index. By contrast, US equity prices had increased continuously since the

correction in spring 2018, with the Standard & Poor's 500 index presently 8%

above its level at the beginning of 2018.

     Finally, with regard to monetary policy expectations, the overnight indexed

swap (OIS) curve had shown various episodes of flattening after the Governing

Council's monetary policy meeting on 13-14 June 2018, which indicated that

markets expected a slower pace of rate normalisation. The expected date of a

first increase in policy rates had, however, not changed materially since 25-26

July. A first 10-basis point increase in the ECB's deposit facility rate was

currently priced in for the fourth quarter of 2019, while survey-based

information suggested a somewhat earlier timing, which might in part reflect the

presence of negative term premia in OIS rates.

     The global environment and economic and monetary developments in the euro

area

Mr Praet reviewed the global environment and recent economic and monetary

developments in the euro area.

     Regarding the external environment, the global economic expansion was

continuing at a steady pace, at rates close to potential but with substantial

cross-country divergences. Inflation and wage dynamics had gained some momentum.

At the same time, global trade had decelerated, while protectionist threats

persisted. Brent crude oil prices had risen by 8% (in US dollar terms) since the

Governing Council's July monetary policy meeting, and non-oil commodity prices

had fallen by 2.3%. The euro had appreciated somewhat in nominal effective terms

but had depreciated slightly against the US dollar.

     Turning to the euro area, recent data indicated that the moderation in the

first half of 2018 had reflected a pull-back from very high growth in the

previous quarters, mainly on account of weaker export demand. Since the

Governing Council's July meeting, high-frequency indicators had stabilised and

remained at elevated levels, underlining the overall robustness of economic

activity. Private consumption had continued to grow at a robust pace in the

second quarter of 2018, supported by the ongoing rise in labour income. Strong

demand and earnings remained supportive of business investment. Surveys showed

that capacity utilisation in the capital goods-producing sector had remained at

all-time highs. At the same time, euro area trade momentum had continued to

moderate in May. This weakening in momentum reflected mainly a deceleration in

extra-euro area trade, especially with Asia, and was concentrated in the trade

of intermediate goods.

     These developments were also reflected in the September 2018 ECB staff

macroeconomic projections for the euro area, which projected real GDP growth at

2.0% in 2018, 1.8% in 2019 and 1.7% in 2020, with real GDP growth revised down

by 0.1 percentage point for both 2018 and 2019. The revisions were mostly

attributable to a weaker than previously expected contribution from net trade,

reflecting downward revisions to foreign demand and a stronger effective

exchange rate of the euro. These effects offset the upward impact on domestic

demand stemming from lower lending rates and some fiscal stimulus. The ECB staff

projections stood at the lower end of other available forecasts for 2018 and

2019, and at the upper end of the range for 2020.

     Turning to price developments, according to Eurostat's flash estimate,

annual HICP inflation was 2.0% in August, down from 2.1% in July, with HICP

inflation excluding energy and food edging down to 1.0%, from 1.1%, over the

same period. Measures of underlying inflation remained muted but were on a

gradually improving path. Incoming data supported the assessment that domestic

cost pressures were strengthening and broadening. In the domestic supply chain,

producer price inflation for both goods and services was increasing, and prices

of imported consumer goods were again rising. As regards wage developments, the

annual growth in compensation per employee had increased to 2.3% in the second

quarter of 2018, up from 1.9% in the first quarter.

     In the September ECB staff projections, headline inflation was expected to

stand at 1.7% in each year of the projection horizon, unchanged from the June

Eurosystem staff projections. The stable path of annual average inflation rates

continued to mask a decline in the annual growth rate of the energy component -

as the impact of the past increases in oil prices faded - which was offset by

gradually rising underlying inflation as supply constraints became increasingly

binding. The September projections were in line with the forecasts of other

international and private sector institutions.

     Market-based inflation expectations were largely unchanged since the

Governing Council's July monetary policy meeting.

     Financial conditions had tightened to some degree, while the cost of

financing for non-financial corporations (NFCs) and households remained

favourable. The expected timing of a first increase in ECB policy rates was

largely unchanged. Euro area equity markets had declined since the Governing

Council's July meeting, with earnings expectations broadly unchanged. The

overall cost of financing for euro area firms had remained very favourable by

historical standards.

     Turning to money and credit developments, M3 growth had moderated in July

to 4.0%, partly reflecting volatility and base effects. At the same time, the

sources of money creation had continued to shift from the asset purchase

programme (APP) towards private credit. Euro area bank lending rates remained

favourable and stood close to historical lows. The composite cost of borrowing

for NFCs had decreased to 1.6% in July, while the composite rate on loans to

households for house purchase had remained stable at 1.8%.

     Regarding fiscal policy, the euro area fiscal stance, as measured by the

change in the cyclically adjusted primary balance, was projected to move from

broadly neutral to mildly expansionary in 2019.

     Monetary policy considerations and policy options

Summing up, Mr Praet concluded that, since the Governing Council's July monetary

policy meeting, financial conditions had tightened somewhat, while borrowing

conditions for households and firms remained very favourable.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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