17 January, 2019
The European Central Bank released its meeting minutes from the December monetary policy meeting last week. The minutes showed that ECB officials were close to giving a downbeat assessment of the economic prospects for the Eurozone.
The Central Bank removed the crisis-era monetary stimulus program by ending its 2.6 trillion euro quantitative easing program.
The meeting minutes showed that the policymakers debated highlighting the delicate balancing act. Major central banks withdrew the crisis era support and tightened monetary policy. There are fears of a slowdown in the global economy and institutions act accordingly.
The ECB's governing council members debated on the language of the monetary policy. A change in the outlook went from "balanced" to "tilted to the downside." The minutes revealed details on the worsening conditions in the Eurozone and the global economy.
However, a compromise was struck with the final message coming out as the risks being described as being balanced but "moving to the downside."
The ECB held its meeting in December when it announced an end to its quantitative easing program. The announcement came amid the German economy slowing in the third quarter. This also dragged the Eurozone's economy lower amid fading prospects for any rebound in economic activity.
While the Eurozone economy is still in expansion, the conditions have not worsened yet for the ECB to reactivate its stimulus program.
"It was underlined that the situation remained fragile and fluid, as risks could quickly regain prominence or new uncertainties could emerge," the ECB said in the minutes.
As a precaution, officials discussed revisiting the cheap, multi-year loans to banks. Also known as the Targeted Long Term Refinancing Operations, the ECB previously used the TLTRO's during the height of the financial crisis. The discussion on launching the TLTRO comes as the ECB ended its QE program in December.
At the December meeting, the ECB President Mario Draghi cautioned about the growing risks to the economy amid weaker data. The minutes showed that policymakers expect Draghi to be even more cautious. Some members called for a new round of cheap credits to the banks. This is a crucial source of lending especially for fragile Eurozone economies such as Italy, Portugal, and Spain.
The meeting minutes are likely to cement the market expectations that the Central Bank could launch its TLTRO program in the coming months. The expectations increase amid recent data from Germany suggesting that the economy most likely contracted in the fourth quarter of the year as well.
The potential ramifications suggest that the Eurozone growth could also be lower in the final three months of 2018.
Germany's industrial production and manufacturing output declined as well as weaker exports and imports which impacted the trade balance figures.
"Looking ahead, the suggestion was made to revisit the contribution of targeted longer-term refinancing operations to the monetary policy stance," the ECB said in its account of the December meeting.
The governing council also discussed reinvestment on the maturing debt.
The ECB stated that interest rates will be steady at least until the middle of next year. Market expectations suggest that the ECB could keep rates unchanged until next year.
Recent inflation estimates showed that headline inflation eased from the ECB’s target rate of 2.0%. Core inflation remained steady although still well below the inflation target rate. Inflation and GDP show signs of a slowdown. This could make ECB turn dovish in the upcoming meetings and launch the TLTRO program sooner than expected.
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