ECB Policymakers Sought Caution In Adjusting Policy Communication, Minutes Says
Policymakers agreed that there was a need for great caution in
undertaking even subtle changes in communication so as to avoid
market volatility similar to the 'taper tantrum' in 2013, the
minutes of the minutes of the European Central Bank's policy
session on April 26-27 revealed Thursday.
"It was felt that the Governing Council's communication should
be adjusted in a very gradual and cautious manner as, at the
current juncture, monetary and financial conditions were
particularly sensitive to changes in communication," the minutes,
which the ECB calls "the account", said.
"After a long period of very accommodative monetary conditions,
even small and incremental changes in communication could have
strong signalling effects when interpreted as heralding a change in
the monetary policy stance."
In 2013, when the US Federal Reserve started winding down its
stimulus, the move triggered a sell-off in the bond markets leading
to a surge in Treasury yields. This market turbulence was dubbed
'taper tantrum', which the ECB is keen to avoid.
Given the persisting uncertainty, any premature tightening of
financial conditions could put the prospects of a sustained change
in inflation towards the ECB's goal of 'below, but close to 2
percent' at risk, policymakers agreed.
ECB Chief Economist Peter Praet stressed that the Governing
Council must be "particularly cautious regarding the future
evolution of its policy communication".
"Any substantial change in communication needed to be motivated
by some more evidence that the present indications of acceleration
in activity found confirmation in hard data and fed through to a
sustainable adjustment in inflation," Praet said, according to the
At the forthcoming policy session on June 7-8 in the Estonian
capital Tallinn, policymakers would be presented with the new round
of ECB staff macroeconomic projections and a new assessment of the
risks to the outlook that will help decide on future stance.
The Governing Council members also agreed to emphasize in the
communication that the risks to the euro area growth outlook were
moving towards a more balanced configuration, while still remaining
tilted to the downside, the minutes said.
Some members suggested that risks to real GDP were now broadly
balanced, in particular given the improvement in recent data and
indicators and the decline in political uncertainty.
Rate-setters found that the external outlook was still subject
to high uncertainty, mainly due to the vagueness linked to the
policies of the new US administration. The Brexit, China's
transition to a slower growth path and developments in the emerging
markets were the other concerns.
"In particular, reference was made in the discussion to the high
degree of uncertainty surrounding short-term developments in the US
economy, which reflected a significant divergence between hard and
soft data for the United States," the minutes said.
"Moreover, financial market participants and investors were
reassessing the outlook for US growth and inflation, as it appeared
that US data were no longer exceeding market expectations, and
there was still considerable uncertainty surrounding the new US
Administration's policies, including the prospects for fiscal
stimulus, and their likely expansionary effects."
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