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ECB Minutes: Governing Council Saw Rising Downside Risks In September

ECB 100815

Downside risks to the euro area growth and inflation outlook, mainly those stemming from the slowdown in emerging economies and the volatility in forex markets, had "clearly increased", while it was too early to conclude that they will have a lasting impact, the minutes of the European Central Bank Governing Council rate-setting session, held on September 2-3 showed Thursday.

"There was broad agreement that the overall economic situation in the euro area had become more challenging since before the summer," the minutes said. Yet, the revisions to the outlook did not fundamentally alter the assessment of an ongoing moderate recovery and a gradual increase in inflation over the coming years.

"There was wide agreement that, while recent market volatility was a sign of increased risk and heightened uncertainty over the economic outlook, it was too early to form a sound judgement on whether such developments would have a lasting impact on euro area economic developments and, in particular, the medium-term outlook for inflation," the minutes said.

Policymakers felt the need for more time to form a better judgement of the underlying driving forces and to analyse the factors behind the recent volatility in financial and commodity markets in greater depth, the minutes said.

ECB Chief Economist Peter Praet pointed out the need to strike a right balance between recognizing increased downside risks and new sources of uncertainty, while avoiding drawing premature conclusions.

"Challenges facing emerging market economies were clouding the global outlook and were unlikely to recede quickly, while lower oil prices were expected to support domestic demand in the euro area, but not to fully compensate for the impact of weaker global demand and a stronger euro exchange rate," Praet said.

The International Monetary Fund this week retained its Euro area growth forecast for this year at 1.5 percent, while the outlook for next year was cut to 1.6 percent.

The Governing Council asserted that asset purchase program would be fully implemented and would run until the end of September 2016, and beyond, if needed.

"The APP stood at only one-third of the trajectory that had been set out by the Governing Council, implying that a substantial degree of accommodation was still in the pipeline," the minutes said.

Capital Economics expects the the ECB to both accelerate and extend its quantitative easing programme, with the monthly purchases raised from the current EUR 60 billion per month to perhaps EUR 80 billion, either at the next monetary policy meeting ending on October 22 or the following one on December 8.

"The purchases would need to increase to EUR 100 billion per month and continue until June 2017 to match the programmes ultimately carried out in the UK and US, as a share of GDP," Capital Economics economist Jonathan Loynes said.

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