(Bloomberg) -- European Central Bank policy makers considered removing a pledge to increase their bond-buying program if needed when they met last month.
As the likelihood of calls for unconventional policy measures to be stepped up had “clearly diminished,” the Governing Council discussed removing the easing biases in their policy communication, an account of the June 7-8 meeting showed. While they ultimately opted only to change the wording on interest rates, “it was argued that the improved economic environment with vanishing tail risks, in principle, suggested also revisiting the easing bias with respect to the asset-purchase program.”
The account highlighted how nervous decision-makers are about the outlook for the post-crisis recovery as they edge cautiously toward the day they start unwinding their extraordinary measures. Governors considered the combination of a downward revision to the inflation outlook and an upward revision to growth as “puzzling,” considering that a closing output gap should push wages and prices higher.
“It was cautioned that even small and incremental changes in the communication could be misperceived as signaling a more fundamental change in policy direction” that leads to an unwarranted tightening in financial conditions, the account showed. “While there were valid reasons at this juncture to retain the APP easing bias, it was noted that, as the economic expansion proceeded and if confidence in the inflation outlook improved further, the case for retaining the bias could be reviewed.”
Chief Economist Peter Praet, who presented the economic outlook at the meeting, reiterated his call for caution when he spoke in Paris earlier on Thursday, saying that further patience is required for the ECB to accomplish its mission.
Steady Hand
“Maintaining a steady hand continues to be crucial to fostering a durable convergence of inflation toward our monetary policy aim,” he said.
Those remarks come after President Mario Draghi sent the euro and bond yields soaring last week with an apparent shift in his so-far dovish tone. He said that reflationary pressures in the euro-area economy may create room to pull back on stimulus without tightening financial conditions.
The euro traded up 0.3 percent at $1.1386 at 2:04 p.m. Frankfurt time.
The reasons for retaining the bias on quantitative easing included that stronger growth had yet to translate into stronger inflation dynamics. Policy makers also argued that the QE language differed in nature from the bias on policy rates. Changing the wording on QE could be interpreted as a description of the Governing Council's reaction function, even if a decision to expand the pace and horizon of bond-buying “had become less likely.”
Euro-area inflation slowed to 1.3 percent in June, compared with 1.4 percent the previous month. That's well short of the goal of just under 2 percent, a target the ECB doesn't project it'll reach on a sustainable basis until at least late 2019. The core rate, excluding energy and food, accelerated to 1.1 percent but has been volatile in recent months.
Growth Risks
The Governing Council upgraded its assessment of euro-area growth at the June meeting, saying the risks are now balanced instead of tilted to the downside, but reiterated its pledge to increase the size or duration of the 2.3 trillion-euro ($2.6 trillion) program if the outlook worsens. It didn't discuss what will happen to the program after the end of this year, when purchases are currently scheduled to stop. Most economists foresee the program being tapered in 2018.
Some policy makers cautioned against overestimating the impact of normal electoral cycles on economic confidence. Officials had differing views over whether downside risks had diminished or whether they were little different from previous policy meetings, which took place before the final round of the French presidential election.
--With assistance from Brian Swint and Lucy Meakin
To contact the reporter on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net.
To contact the editor responsible for this story: Paul Gordon at pgordon6@bloomberg.net.
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