The European Central Bank headquarters in Frankfurt, Germany. The ECB has undershot its inflation target of almost 2 percent since 2013Ralph Orlowski/Reuters
European Central Bank policymakers took a cautiously optimistic view on the euro zone’s growth prospects in January, the accounts of their policy meeting showed on Thursday, before the coronavirus outbreak created a new challenge for global growth.
The ECB left its super-easy monetary policy stance unchanged last month but argued that inflationary pressures were finally building and growth risks were receding, thanks in part to easing global trade tensions.
But comments since the meeting have been more mixed, with policymakers pointing to the growing economic toll of the coronavirus outbreak in China.
“It was felt to be important to acknowledge these positive signs and care should be taken to avoid being too slow to change the risk assessment,” the accounts of the Jan 23 meeting showed. “However, some caution was also expressed about becoming too optimistic.”
Policymakers also appeared to take comfort in economic developments mirroring the ECB’s projections, a contentious issue as staff projections have consistently overestimated both growth and inflation in recent years, raising questions about the underlying methodology.
The ECB has undershot its inflation target of almost 2 percent since 2013, despite unprecedented stimulus in the form of negative interest rates, asset buying and ultra cheap loans to banks.
“Incoming economic data and survey information pointed to some stabilization in euro area growth dynamics,” the ECB said. “Near term growth was expected to be similar to rates observed in the previous quarters.”
Still, growth was expected to remain below what is considered the bloc’s potential, suggesting continued weakness.
Stabilization was mainly driven by household consumption and even if manufacturing appeared to be bottoming out, it was not clear if the slowdown in services had stopped.
Policymakers also expressed some optimism about building inflationary pressures, as they saw a continued gradual upward trend in some indicators of underlying inflation.
Although policymakers did not appear to discuss the side effects of ECB policy at length, some members did express concerns about imbalances.
A remark was made that high housing prices could make the financial system more fragile and local measures may be insufficient to address the matter. Others noted that the rise in equity prices did not seem to be reflecting improved earnings, so valuations maybe be disconnected from the real economy.
Responding to criticism that ECB policy would be on autopilot this year as it reviews its strategy, policymakers emphasized that the ECB’s broad review launched at the meeting was a separate exercise and would not constrain it in its upcoming decisions.
The accounts, however, suggest the policymakers did not discuss the review in great detail and merely argued that it was a timely endeavor, given that the global economy had changed since the last review in 2003.
The ECB will next meet on March 12 and economists expect no change from the bank, even if they expect the central bank to put a greater emphasis on risks given the coronavirus outbreak.