ECB Says Cutting Economic Outlook Kept Growth Risks Balanced
European Central Bank officials agreed that a cut to their 2019 growth projection in itself acknowledged that risks to the outlook for the euro-area economy had increased.
That effectively allowed President Mario Draghi to avoid saying in December that the balance of risks was to the downside, which would have jarred alongside a decision to halt bond buying after almost four years. Instead, he described it as broadly balanced and only “moving’’ lower.
“Uncertainties and risks related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial volatility had remained prominent,” the ECB said in the account of its Dec. 12-13 policy meeting published Thursday. “It was underlined that the situation remained fragile and fluid, as risks could quickly regain prominence or new uncertainties could emerge.”
The euro was little changed after the report and traded at $1.1533 at 1:59 p.m. Frankfurt time.
The Governing Council’s December decision to retire its 2.6 trillion euro ($3 trillion) asset-purchase program was “unanimous,” Draghi said at the time. The account confirmed that members agreed with the overall package of policy proposals, which included ending net asset purchases, keeping their language on interest rates unchanged, and linking the so-called forward guidance on their plans to reinvest maturing debt to a first rise in borrowing costs.
“Linking the reinvestment horizon to the interest-rate ‘lift-off’ was seen as signaling that the Governing Council’s policy rate guidance was the primary tool for adjusting the monetary policy stance in the period ahead,” according to the account. A suggestion was made to “revisit the contribution” of previously granted long-term loans to the ECB’s policy stance.
The central bank currently pledges to keep rates at their current levels at least through the summer, even though market participants have taken more recent weakness in data to signal that a hike could be delayed.
Minutes from the Federal Reserve’s Dec. 18-19 meeting showed on Wednesday that policy makers could place interest rates in the U.S. on hold through March or longer as they wait for clarity on risks to global growth that could affect their economy.
Since the ECB’s last policy meeting, consumer and business confidence in the euro area recorded the worst losing streak in a decade. Activity in manufacturing and services dropped to the weakest level since 2014, and data in Germany signaled that an industrial shock could pull the economy into a technical recession.
“It was argued that the current environment could be described as one of ‘risk rotation’ in a state of generally heightened uncertainty,” according to the account. At the same time, officials underlined that “the economy was still expected to growth at a pace close to potential.”
The region’s labor market continues to improve, with data on Wednesday showing a surprise drop in unemployment. Governing Council member Ardo Hansson told Bloomberg earlier this week that “unexpectedly positive” news on wages and jobs growth support his confidence that inflation is on track.
“Members widely shared the view that the pass-through of wages to prices, in particular in the services sector, was a key factor underpinning confidence in the outlook for underlying inflation,” according to the account.