ECB Toyed With Changing Forward Guidance, Worried by Euro Strength -- 2nd Update

By Todd Buell Features Dow Jones Newswires

-The European Central Bank considered updating its forward guidance last month and expressed concern about the euro becoming too strong, the accounts of its latest Governing Council meeting showed Thursday.

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"While it was remarked that the appreciation of the euro to date could be seen in part as reflecting changes in relative fundamentals in the euro area vis-à-vis the rest of the world, concerns were expressed about the risk of the exchange rate overshooting in the future," the minutes of the July 19-20 meeting said.

The Council also toyed with making a slight change to its forward guidance, but decided not to out of caution.

A fall in the euro against the dollar accelerated when the minutes were released, with the common currency down 0.9% on the day before regaining some ground.

"A suggestion was made that some consideration be given to an incremental adjustment in the language on forward guidance," the minutes said.

This was based on the notion that waiting too long to tweak guidance could create a "misalignment" between the ECB's communication and its assessment of the economy, which could bring about increased market volatility when the communication eventually changed.

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The Council ultimately rejected this idea as, "it was generally judged paramount at this stage to avoid sending signals that could be prone to over-interpretation and might prove premature."

"Accordingly there was agreement among all members to retain all elements of forward guidance," the minutes said.

The ECB's forward guidance says the central bank expects interest rates to remain at current levels for an extended period and well beyond the term of its net asset purchases. It currently purchases assets worth EUR60 billion ($71 billion) each month and is due to continue at that pace until at least the end of 2017. The ECB also explicitly reserves the option of increasing or extending the program should economic or financial conditions worsen.

The minutes painted the picture of a central bank that doesn't want to pull the plug too soon on its large bond-buying program, especially as inflation isn't yet at its target of just below 2% in the medium term.

"The case was made for proceeding gradually and prudently when approaching adjustments in the monetary policy stance and communication, in line with the Governing Council's evolving assessment," the minutes said.

The minutes showed that council members felt inflationary pressure remained below acceptable levels. "Members generally agreed that, from the present perspective, the available evidence continued to indicate that convincing progress on a durable and self-sustaining convergence of inflation to the Governing Council's medium-term inflation aim had still to be secured."

At its July meeting, the ECB decided to delay a discussion about whether to taper off its bond-buying scheme. The decision came amid still-weak inflationary pressure, despite robust economic growth.

The European Union's statistics office confirmed Thursday its initial estimate for July inflation of only 1.3%. The most recent ECB staff forecasts, issued in June, show average inflation at 1.5% in 2017 and only hitting 1.6% in 2019. The ECB is due to issue new forecasts in September.

Mr. Draghi said in July that the ECB would have a discussion about the future of quantitative easing in the fall. Investors will also listen very closely to remarks the ECB president is due to make next Friday at the Kansas City Federal Reserve's annual conference in Jackson Hole, Wyoming.

The ECB's struggle to manage monetary policy amid strong growth and weak inflation is echoed in the U.S. Minutes of the most recent Fed policy meeting published Wednesday showed growing concern that weak inflation could signal a fundamental change in the economy, suggesting a need to refrain from additional rate increases.

Write to Todd Buell at todd.buell@wsj.com

(END) Dow Jones Newswires

August 17, 2017 08:33 ET (12:33 GMT)