ECB sees chance of gradual shift in guidance from early 2018

Bloomberg.- The European Central Bank’s guidance on future actions will change slowly as the economy improves and could be revisited early this year, according to a summary of the latest monetary-policy meeting. The euro rose.

“The view was widely shared among members that the Governing Council’s communication would need to evolve gradually, without a change in sequencing, if the economy continued to expand and inflation converged further toward the Governing Council’s aim,” accounts of the Dec. 13-14 session showed on Thursday. “The language pertaining to various dimensions of the monetary-policy stance and forward guidance could be revisited early” in 2018.

The euro jumped half a cent on the publication of the report, and was trading at $1.1985 at 1:36 p.m. in Frankfurt. The yields on German bonds also increased.

At its December meeting, the ECB confirmed its decision to extend quantitative easing until at least September, at a reduced pace of 30 billion euros ($36 billion), despite the strongest economic expansion in a decade. Record-low interest rates will stay on hold until well after purchases stop.

Since that decision, hawks calling for a definite end-date to asset purchases have dominated the public debate, nudging the euro higher amid signs that the investors are readying for the exit of global central banks from years of monetary stimulus.

The central bank’s latest projections show that inflation will only rise to 1.7 percent, arguably still short of the central bank’s goal of just under 2 percent, in 2020.

At the December meeting, Executive Board member Peter Praet, the ECB’s chief economist, suggested that, as the end of QE approached, the guidance on future interest-rate moves would become gradually more important.

“From this perspective, the Governing Council’s forward guidance framework would evolve naturally, in line with the established sequencing,” the accounts showed. “It was suggested that the Governing Council’s communication should be adjusted gradually over time to avoid sudden and unwarranted movements in financial conditions.”

There were dissenting voices.

“A remark was made that a gap appeared to be emerging between favorable economic conditions and a policy stance that remained in a crisis configuration,” the summary showed.

At the previous session in October, some key policy makers including Executive Board member Benoit Coeure and Bundesbank president Jens Weidmann had suggested to tie the overall stance — rather than just QE — to progress on inflation. A reflection on such a move was “warranted,” according to the summary.

The report shows that policy makers agreed that while economic data had been more positive than expected, “measures of underlying inflation had weakened overall and had yet to show convincing signs of a sustained upward trend.

Since December, the strength of the euro-area expansion has been repeatedly confirmed. Economic activity accelerated to the fastest pace in almost seven years while unemployment declined to the lowest level since early 2009. Data earlier Thursday showed an expansion in Germany, the region’s powerhouse, of 2.2 percent for 2017, the strongest since 2011.

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