ECB Confidence Strong for Now Against Trade, Italy Risks

(Bloomberg) -- European Central Bank policy makers flagged protectionism and mounting global risks as potential threats to the euro area, though they stuck to their conviction about the underlying momentum in the economy for now.

“Uncertainty around the outlook had increased,” the Governing Council said in the account of its April 25-26 monetary-policy meeting published on Thursday. “Risks related to global factors, including the threat of increased protectionism, had become more prominent and warranted monitoring.”

The account came hours after the ECB published its Financial Stability Review, where it warned high-debt countries against loosening their purse strings. That's effectively a warning shot to Italy, where a populist coalition has promised a spending spree and tax cuts that rattled confidence in the nation's bonds.

Read more: ECB readies for Italy standoff over populist policies

Yields on Italy's 10-year debt declined on Thursday, having risen in recent weeks to the highest since 2014.

Market turmoil related to Italy would be one more reason for ECB officials to think twice about their plans to gradually reduce monetary stimulus late this year. They're already facing a string of disappointing economic data as well as uncertainty over U.S. trade policy.

Officials used the April meeting to take stock of the latest indicators ahead of a more comprehensive discussion in June. At that time, they'll have new growth and inflation forecasts to help any discussion about whether and how to end quantitative easing. Asset purchases are currently scheduled to end in September.

“Despite the observed moderation in activity, confidence in the underlying strength of the euro-area economy and the eventual convergence of inflation to the Governing Council's inflation aim remained unchanged.”

--ECB Accounts

While policy makers viewed overall risks to the economy as “broadly balanced” at their April session, those stemming from the global outlook were seen on the rise.

In the FSR, the ECB listed four main risks to financial stability in the euro area over the next two years, including spillovers from a disruptive repricing of risk premia in global financial markets and public and private debt sustainability. On fiscal risks, it said “some euro-area sovereigns remain vulnerable.”

“A deteriorating growth environment or a loosening of the fiscal stance in high-debt countries could impact the fiscal outlook and, by extension, market sentiment toward some euro-area sovereign issuers,” the Frankfurt-based institution said in the twice-yearly report.

One of the topics discussed at the Governing Council's April meeting was whether the “moderation” of euro-area growth was a consequence of labor shortages and insufficient output capacity, or rather a sign of slowing momentum.

Policy makers said incoming data ahead of the June meeting would be closely scrutinized. A survey of purchasing managers released this week pointed to a continued slowdown this quarter.

--With assistance from Piotr Skolimowski, Craig Stirling and Zoe Schneeweiss.

To contact the reporter on this story: Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow, Fergal O'Brien

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