Frankfurt: European Central Bank policymakers acknowledged that they were less confident regarding a return of solid growth in the euro area in the second half of the year, minutes of the April 9-10 policy session showed on Thursday.
While the more protracted “soft patch” suggested by the latest data remained consistent with this baseline scenario, “it was acknowledged that there was now somewhat less confidence in this baseline scenario and that the range of other possible outcomes had widened,” the minutes, which the ECB calls “account”, said.
“More information would need to be gathered in the run-up to the Governing Council’s June monetary policy meeting, when new Eurosystem staff projections would become available.”
Policymakers acknowledged that some recent data had turned out even weaker than expected, the minutes said.
“Downside risks, from Brexit and the threat of protectionism in particular, had the potential to further affect confidence and negatively spill over to activity,” they said.
They agreed that the balance of risks surrounding the euro area growth outlook remained tilted to the downside.
After the April policy session, ECB President Mario Draghi said the bank stood ready to deploy more policy tools, if needed, amid a weaker growth outlook.
Regarding the negative deposit facility rate, policymakers pointed out its contribution to increased lending volumes across all loan categories.
Markets widely expect the bank to announce some relief measures in June, such as a tiered deposit rate that can partly reduce the burden of the cost banks pay on the cash they park at the ECB.
However, ECB policymakers are wary of a tiered deposit rate as they fear it could signal that interest rates are going to remain low for a long time.
The new forward guidance issued in March suggest the bank expects the first interest rate hike since the financial crisis to take place in 2020.
Eurozone interest rates were raised last in July 2011, by 25 basis points.
The new series of targeted longer-term refinancing operations, or TLTRO-III, announced in March, is set to start in September and end in March 2021, thus with a maturity of two years.
ECB rate-setters proposed that the pricing of the new TLTRO-III operations should be data-dependent and should consider a thorough assessment of the bank-based transmission channel of monetary policy, as well as further developments in the economic outlook.
While some argued for pricing the new operations so that they would primarily serve as a backstop, providing insurance in times of elevated uncertainty, others supported the view that the TLTRO-III operations should also be seen as a potential tool for adjusting the monetary policy stance, the minutes said.
With growth unexpectedly weak for months now, the ECB has raised the prospect of more support for the economy but argued that more analysis was needed to see if the rapid loss of economic momentum is persistent or temporary.
But action is all but certain in June, with the ECB expected to support growth by giving banks very generous terms at its upcoming tender of ultra cheap loans to ensure that credit continues to flow to the economy.
“It was acknowledged that some recent data had turned out even weaker than expected,” the accounts of the meeting showed. “There was now somewhat less confidence in the baseline scenario (for growth) and that the range of other possible outcomes had widened.”
Policymakers said that the terms of the new banks loans, called targeted longer-term refinancing operations or TLTROs, would be decided at one of the upcoming meetings but the accounts provided few details about their thinking.
“Some arguments were put forward in favor of pricing the new operations so they would primarily serve as a backstop, providing insurance in times of elevated uncertainty,” the accounts showed.
“Other arguments supported the view that the TLTRO-III operations should be seen as a potential tool for adjusting the monetary policy stance,” the ECB added.
In any case, the pricing will take into account economic growth and how well banks transmit the ECB’s policy stance to the real economy, the minutes showed.
But policymakers did not appear to have any significant discussion about the impact of negative rates on banks and the need for compensation.
One form of mitigation, the introduction of a multi-tier deposit rate, could help banks with abundant excess reserves but policymakers speaking on and off the record have not voiced any enthusiasm for such a scheme.
Indeed, the minutes only showed a discussion about the need for a future discussion on whether the side effects of negative rates need to be mitigated.
In a possible hint about the direction of such a conversation, policymakers noted that the negative ECB deposit rates was still contributing to increased lending volumes in all loan categories.
Although fresh ECB measures could prop up the economy, the ECB’s problem is that the bloc’s troubles are largely outside its sphere of influence.
With global trade slowing on the ripple effects of the trade war between the United States and China, the bloc’s troubles are largely imported, contributing what ECB chief Mario Draghi called “pervasive uncertainty”.
Indeed, fresh business data on Thursday pointed to increasing weakness in the manufacturing sector, suggesting that its recession is persistent, and analyst predict even more pain.
“The global outlook remained subject to the continued risk of an escalation of trade conflicts and the uncertainty surrounding the withdrawal of the United Kingdom from the EU,” the ECB said in the minutes.