ECB Satisfied With Rate Guidance as Italy Turmoil Sidelined

(Bloomberg) -- European Central Bank policy makers said at last month’s meeting that investor expectations are aligned with their own plans, while expressing concern over the risk of trade spats and glossing over Italy’s political troubles.

“Members widely expressed satisfaction that the communication of the June monetary policy decision had been well understood by financial markets,” the ECB said in the record of July 25-26 policy meeting, published Thursday. Risks to the economic outlook were “broadly balanced” though “uncertainties related to global factors remained prominent, in particular with regard to the threat of protectionism and the risk of an escalation of trade tensions.”

In their last meeting before the summer break, ECB President Mario Draghi and his colleagues confirmed their plans for a gradual exit from ultra-loose policy, saying that data confirmed the euro-area recovery was solid and inflation on track toward their goal. On June 14, the ECB had announced that net bond-buying would end in December 2018 and that rates would stay on hold “at least through the summer” of 2019.

Volatility Risk

There was no sign of any discussions on the rise of Italian bond yields after the installation of a populist government -- which includes euro-skeptic officials, and which promises to challenge European spending rules. The Governing Council saw the “risk of persistent heightened financial market volatility” but noted “only modest changes in sovereign and corporate debt markets” since its previous session.
This formulation “struck an appropriate balance between being sufficiently precise to provide effective forward guidance and maintaining a suitable degree of flexibility,” according to the account. The announcement “had been effective in aligning market views about the future evolution of policy rates with the Governing Council’s expectation.”

While the euro-area’s expansion was continuing, policy makers warned that “trade tensions could generate a more general decline in confidence throughout the global economy, beyond any direct effects from the imposition of tariffs.” They also expressed concern over the impact of trade tensions on emerging markets, and the recent depreciation of their currencies.

Since July, the euro-area outlook has been bolstered by a tick-up in economic activity in a survey of purchasing managers, and by further signs that wages are finally increasing robustly. The ECB next meets to set policy on Sept. 13, when it will also publish updated economic projections.

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