ECB Toyed With Changing Forward Guidance, Worried by Euro Strength -- 3rd Update

By Todd BuellFeaturesDow Jones Newswires

The European Central Bank was worried in July that the euro might become too strong and decided against a change to its forward guidance that could have driven the currency higher, the accounts of its latest meeting showed Thursday.

"Concerns were expressed about the risk of the exchange rate overshooting in the future," the minutes of the July 19-20 meeting said.

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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.

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 minutes depicted 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.

Analysts said the records showed the ECB remained committed to a gradual ending of stimulus but wasn't quite sure how to go about it.

"Tapering will come, but somehow the ECB itself does not yet entirely know when and how to do it," said ING economist Carsten Brzeski.

Mr. Brzeski said he expected the ECB to take another "baby step" toward ending quantitative easing at its next meeting on Sept. 7.

"This could be done by putting more emphasis on the strong economic recovery--which easily could do with somewhat less monetary stimulus--and/or by using the well-known key phrase, that 'the Governing Council has tasked the relevant committees to investigate several options for QE in 2018,'" he said.

The ECB's forward guidance indicates it 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 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 QE 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 minutes of the ECB's July policy meeting suggest that there will be no fireworks from President Draghi in his Jackson Hole speech next week, " Jessica Hinds of Capital Economics said.

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

(END) Dow Jones Newswires

August 17, 2017 09:11 ET (13:11 GMT)