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ECB Policymakers Concerned That Current Soft Patch Would Last Longer: Minutes

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The European Central Bank policymakers expressed concern in the March policy session that the current soft patch in the economic momentum would last longer than projected, the minutes of the session showed on Thursday.

"Members acknowledged that, while the baseline scenario of a more protracted "soft patch" followed by a return to more solid growth was the most likely scenario, uncertainty remained elevated and it was unclear how persistent the current soft patch would turn out to be," the minutes, which the ECB calls the "account", of the March 6-7 Governing Council meeting said.

Policymakers stressed the growth momentum was weaker, but remained positive.
"Neither the euro area, nor the global economy, was currently in recession and the probability of a recession remained relatively low," the minutes said.

In March, the ECB Governing Council, led by President Mario Draghi, cut the growth outlook for this year to 1.1 percent from 1.7 percent seen in December. The outlook for next year was trimmed to 1.6 percent from 1.7 percent.

The view was widely shared that downside risks to the growth outlook continued to prevail, despite the downward revisions incorporated in the March projections, the minutes said.

Some member also remarked that some factors behind the slowdown, such as the weakness in the Chinese economy, are unlikely to fade away in a few months.

"Uncertainty might also turn out to be more persistent than expected and concern was expressed that, if the current high level of uncertainty persisted, there could be a stronger adverse impact looking ahead, in particular on investment," the minutes said.

Policymakers concluded that had the risk factors had the potential to further affect confidence and global activity negatively, with adverse spillovers to activity in the euro area.

The Governing Council also debated the impact of the ultra-low interest rates and some policymakers expressed concern that "over time the effects of persistently low rates could depress banks' interest margins and profitability with negative effects on bank intermediation and financial stability in the longer run."

Rate-setters also agreed the current forward guidance does not pre-empt the "the Governing Council's readjustment of its monetary policy, if needed, at one of its coming meetings should the outlook evolve less favorably than expected."

The minutes also said that a number of members voiced an initial preference for extending the forward guidance through the end of the first quarter of 2020. However, they agreed to join a consensus viewing the overall policy package as finely balanced.

"Shifting the forward guidance to March 2020 instead of December 2019 would provide additional accommodation and would be more in line with the markets' pricing of a first interest rate increase, compared with survey-based expectations," the minutes said.

"It was argued that a clear easing signal would be important in view of the significant downward revisions to the ECB staff projections."

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