A euro sign sculpture is seen outside the European Central Bank (ECB) headquarters in Frankfurt, Germany. (Photographer: Hannelore Foerster/Bloomberg)  

ECB Waits for 2021 Projections While Noting Economic Fragilities

(Bloomberg) -- European Central Bank officials acknowledged “uncertainties and fragilities” affecting the economy at their latest policy meeting, while agreeing that they weren’t enough to weaken confidence that the euro zone’s domestic strength will prevail.

“It needed to be emphasized that the incoming data, while somewhat weaker than expected, remained overall consistent with with an ongoing broad-based expansion,” the ECB said in the record of its Oct. 24-25 policy meeting published Thursday. New forecasts in December -- which will include an outlook for 2021 for the first -- “would provide an occasion for a more in-depth assessment.”

Key Insights

  • The publication comes three weeks before the ECB holds its final policy meeting of the year, when it’s expected to confirm it will cap its bond-buying program, a key step toward slowly normalizing its policy.
  • Officials agreed that “continuity and steadiness with respect to monetary policy were particularly warranted in an environment that was still subject to a number of uncertainties and fragilities”
  • “A remark” was made that there were a number of reasons to describe the risks to euro-area economic growth as tilted to the downside. The Governing Council eventually opted to stick with its language describing the risks as “broadly balanced”
  • While acknowledging concerns over the risks from trade protectionism, the Governing Council also said the adverse impact on “more open” economies might be being offset by “presently more buoyant imports, particularly in the U.S.”
  • The Governing Council noted that companies have so far absorbed higher wages by reducing their markups, so damping the transmission to consumer-price inflation, but also argued that markups “could not be squeezed indefinitely”
ECB Waits for 2021 Projections While Noting Economic Fragilities

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  • Absent from the ECB account are any remarks on the possibility of offering a new round of cheap funding to banks. Draghi had mentioned during his press conference that these were brought up.
  • There’s also no mention of a discussion on how to reinvest maturing debt under the ECB’s asset-purchase program. French Governor Francois Villeroy de Galhau has said the ECB shouldn’t rush to spell out the reinvestment strategy.
  • These are the key events that will inform ECB policy until the Governing Council’s next decision on Dec. 13.
  • Economic growth weakened considerably from Germany to Italy. While the trend might be temporary, it could also be a sign that the euro area’s expansion is running into trouble.

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