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ECB Policymakers Sought Continued Caution In Communication: Minutes


European Central Bank policymakers agreed that there was a need to maintain caution in communication as underlying inflation was still subdued and substantial monetary policy stimulus was necessary to support the ongoing euro area recovery, minutes of the June 7-8 policy session held in Tallinn, Estonia, showed Thursday.

"It was cautioned that even small and incremental changes in the communication could be misperceived as signalling a more fundamental change in policy direction," the minutes, which the ECB calls "account", said.

"This could trigger unwarranted movements in financial conditions, which could put the prospects of a sustained adjustment of inflation at risk."

In June, the ECB dropped its downward bias on interest rates from its forward guidance, but retained the same for its EUR 2.3 trillion asset purchases.

While vanishing tail risks justified the dropping of the downward bias on interest rates, the move "only signaled that, given the current outlook and risk assessment, from the present perspective a further rate reduction had become unlikely," the minutes said.

Policymakers also agreed that removing the policy rate bias could support confidence in the strength of the euro area recovery.

An argument to remove the easing bias on asset purchases was also raised in the June policy session, given the improved economic situation, the minutes revealed.

"However, it was cautioned that prudence remained warranted, as the economic expansion had yet to translate into stronger inflation dynamics, and a sustained adjustment in the path of inflation towards the Governing Council's inflation aim could not yet be confirmed," the minutes said.

"The assessment of the prospects for a sustained adjustment argued for patience, as the inflation outlook remained vulnerable to a premature tightening of the monetary policy stance."

Some members also pointed out that the easing bias on asset purchases differed in nature from that on policy rates as the former was more a description of the reaction function of the Governing Council, reflecting its readiness to respond to contingencies by changing the pace and/or horizon of asset purchases.

"While there were valid reasons at this juncture to retain the APP easing bias, it was noted that, as the economic expansion proceeded and if confidence in the inflation outlook improved further, the case for retaining this bias could be reviewed," the minutes said.

Consequently, the ECB reaffirmed in its June policy statement that its current monthly asset purchases of EUR 60 billion would continue until the end of this year, or beyond, if necessary, until there was a sustainable shift in inflation towards the bank's aim of 'below, but close to 2 percent'.

Suggesting its easing bias on asset purchases, the bank also said that it was ready to increase the volume and/or duration of asset purchases if the outlook or financial conditions became less favorable.

There was also broad agreement among members regarding "maintaining a steady hand" with respect to the monetary policy stance, something the ECB Chief Economist Peter Praet stressed in a speech earlier on Thursday.

Praet reiterated the need for patience, saying inflation convergence needs more time to show through convincingly in the data. Similar stance was mentioned in the minutes.

He also stressed that the ECB needs to be persistent in its policy efforts as the baseline scenario for inflation going forward remains crucially contingent on very easy financing conditions which, to a large extent, depend on the current accommodative monetary policy stance.

Praet's comments echoed those of ECB President Mario Draghi's from last week.

On June 27, the ECB Chief said in Sintra, Portugal, that the bank can support the euro area economic recovery by tweaking its policy instruments as deflation risks have disappeared and reflationary pressures are at play.

But, Draghi stressed that such tweaks must be gradual and need to be taken with prudence, and the policy needs to be persistent.

ECB policymakers are apparently trying to damp market expectations of a tapering move that were fueled by Draghi's remarks.

His comments sent the euro and bond yields higher as they were construed as signals that the ECB was ready to wind down its massive stimulus, which is a mix of EUR 2.3 trillion asset purchases and ultra-low interest rates.

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