Brexit Effects Worry ECB, but Bank Holds Fire on Stimulus --Update

FRANKFURT--European Central Bank policy makers warned at their July meeting that Britain's decision to leave the European Union could affect the world economy in unpredictable ways, but they decided it was too soon to discuss any fresh stimulus measures.

The minutes of the July 21 ECB policy meeting, published on Thursday, showed that policy makers also expressed concerns about Europe's weak banking sector, which they worried could hamper the ECB's efforts to reduce loan costs across the region.

The ECB left its policy mix unchanged at its July meeting and ECB President Mario Draghi stopped short of signaling that the bank would boost its stimulus again soon. The ECB has already cut interest rates below zero and is purchasing EUR80 billion ($90.18 billion) a month of mainly eurozone government bonds in an effort to support the bloc's economy.

Still, with eurozone inflation hovering around zero and the economic outlook uncertain, most economists expect the ECB to boost its stimulus again--probably at its policy meeting on Sept. 8, when fresh economic forecasts will factor in the likely impact of Brexit.

The Bank of England has already responded aggressively to a weakened outlook for the U.K. economy, cutting interest rates and launching a fresh bond-purchase program at its Aug. 3 policy meeting.

Jennifer McKeown, an economist with Capital Economics in London, said the latest minutes appeared to confirm that the central bank was preparing to loosen policy again. She highlighted remarks attributed to the ECB's chief economist, Peter Praet, that underlying inflation in the euro area "continued to lack a convincing upward trend and remained an ongoing source of concern."

Eurozone inflation was 0.2% in July, the EU's statistics agency confirmed earlier Thursday. That was up slightly from 0.1% the previous month, but far below the ECB's target of just below 2%, which it has missed for 3 1/2 years.

ECB policy makers acknowledged "new headwinds" to the bloc's economic recovery as a result of the Brexit vote, and underlined their willingness to provide fresh stimulus again if needed.

However, "it was widely felt among members that it was premature to discuss any possible monetary policy reaction at this stage," the minutes said.

"More time was needed to assess the incoming information over the coming months, although downside risks had clearly increase," the minutes said.

Ms. McKeown expects the ECB to act aggressively at its September policy meeting, accelerating its asset purchases to EUR90 billion a month, extending their duration by six months to Sept. 2017, and cutting its deposit rate--charged to banks for storing funds with the central banks--to minus 0.5% from minus 0.4%.

Such action would likely be resisted by Jens Weidmann, president of Germany's influential Bundesbank, who has said he sees no need for fresh stimulus as a result of the Brexit vote.

At their July meeting, policy makers also said they would closely monitor how their stimulus measures were being transmitted to the economy through the banks. They pointed to "risks to bank-based transmission" that had implications for the cost of borrowing and the availability of credit.

European bank stocks fell sharply in the wake of the U.K. referendum, continuing a downward trend. The slump is partly due to the impact on bank profitability of the ECB's low interest rates, policy makers said.

Howard Archer, an economist with IHS Global Insight in London, said concerns over the banks made it unlikely that the ECB would cut interest rates again.

"While the ECB has indicated that interest rates could possibly go lower, there is clearly heightened concern over the impact that negative or low interest rates are having on eurozone banks," Mr. Archer said.

Write to Tom Fairless at