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ECB Policymakers Sought Caution In Adjusting Policy Communication, Minutes Says

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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 minutes.

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."

by RTT Staff Writer

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