Bond buying, risks to growth and Grexit threat: Seven key takes from the European Central Bank’s July minutes
The European Central Bank (ECB) has released the minutes from the meeting of its governing council which took place on Wednesday and Thursday this week.
Here are seven key extracts:
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1. Bond buying is becoming more difficult
Portfolio managers had reported that purchases of eligible covered bonds were becoming more challenging. Several factors had contributed to this situation.
First, euro area covered bond supply had slowed since the end of May and had remained quite low compared with previous years. Second, the period of volatility had reinforced the status of covered bonds as a safe-haven instrument, which was also consistent with their favourable regulatory treatment, including the no bail-in treatment under the bank recovery and resolution directive.
Covered bonds had thus benefitted from the flight to quality and this had possibly deterred some investors from reducing their covered bond positions in favour of other assets with better relative value.
2. Balance of risks to growth remain to the downside
The balance of risks to the economic outlook for the euro area was seen to remain on the downside.
The outlook for net exports, while benefiting from lower energy prices and improved price competitiveness, remained subject to downside risks related to a possible reversal of recent energy price and exchange rate developments, as well as lower than expected global trade growth.
In particular, financial developments in China could have a larger than expected adverse impact, given this country’s prominent role in global trade.
This risk could be compounded by negative knock-on effects from interest rate increases in the United States on growth in EMEs.
3. Grexit risk appears to be contained
Risks stemming from developments related to Greece and the ongoing negotiations with its creditors appeared to be generally contained. It was also felt that recently improved prospects for the negotiations of a third financial programme for Greece could be expected to contribute to a firming of confidence across the euro area," the minutes said.
Nevertheless, setbacks in those negotiations could still negatively affect confidence and activity, and some caution was expressed regarding potential contagion risks in particularly adverse scenarios, which should not be underestimated.
4. Focus is shifting to China and the United States
Finally, with regard to developments in international markets, following the agreement on Greece on 13 July the focus had seemed to be shifting towards China and the United States.
5. Inflation will remain low, rising later in the year
The outlook for price developments had not changed materially since the previous monetary policy meeting in early June, with inflation remaining low but expected to rise later in the year, broadly in line with earlier expectations and with the June Eurosystem staff projection.
6. Bank lending continues to recover
Money and credit dynamics had continued to recover, with credit growth gradually improving further, although it remained subdued overall. Recent data had confirmed robust growth in broad money (M3), which continued to be strongly supported by a further pick-up in the narrow monetary aggregate M1," the minutes said.
An encouraging signal was seen to come from the continued normalisation in loan dynamics and visible improvements in credit conditions. While recovering only gradually, the annual rate of change in loans to [non-financial corporations] had turned positive for the first time since mid-2012, continuing its upward trend from the trough of -3.2 per cent in February 2014.
Similarly, growth in bank lending to households had recovered further.
7. Markets should stay vigilant
Moreover, while recent market volatility had not materially changed the assessment of the economic outlook, continued elevated uncertainty called for alertness and a readiness to respond, if necessary.
Therefore, it appeared warranted to continue to closely monitor the situation in financial markets, with a view to potential implications for the monetary policy stance and for the outlook for price stability.