The euro zone’s central bankers want to maintain “a steady hand” as they continue to plan for the removal of their crisis-era stimulus in the face of concern that the slowdown in growth may prove more than a blip.
The bank also warned that it needed to strengthen its message on government spending in the face of events in Italy.
After a bumper 2017, growth in the opening months of this year has been slower in the euro zone. Most economists view the setback as temporary – though weak sentiment surveys for the second quarter have raised concern of a longer-lasting period of lower growth.
While policymakers at the European Central Bank said in minutes of the governing council's meeting in late April that the region's expansion remained "broadly intact", they acknowledged that the uncertainty surrounding the economic outlook had "clearly increased".
The formation of an anti-establishment coalition government in Italy that has put increased spending at the core of its proposals has raised concern among officials in Frankfurt and Brussels.
The ECB said in the minutes: “There was broad agreement among members that it was warranted to reinforce calls for existing fiscal rules to be respected and for fiscal buffers to be rebuilt, in particular with regard to those member states with high levels of government debt.”
A bind
The slowdown and political events have left policymakers in a bind. The council has signalled that it would like to stop buying new bonds under the €2.4 trillion quantitative easing programme by the end of the year and could begin to raise rates from their current record lows around the middle or during the second half of next year.
However, a spell of weak growth could force the council to delay its exit. While most expect quantitative easing to come to an end in December, markets are pushing back their expectations of when the bank will raise rates to later in 2019.
A change in communications on what comes next for the bank was expected in June, but now looks more likely to come in July because of the slowdown in growth.
The threat from protectionism and profligate governments had risen, meaning the bank would have to keep a close eye on incoming data in the months ahead.
“While risks surrounding the euro-area growth outlook remained broadly balanced, it was acknowledged that the risks related to global factors, including the threat of increased protectionism, had become more prominent and warranted monitoring,” the minutes said.
Weather conditions, strikes and an unusually severe wave of influenza have all been blamed for the slowdown by those who view it as temporary in nature. The closely-watched purchasing managers’ index hit an 18-month low in May, leading some to suspect that the effects may be longer lasting. – Copyright The Financial Times Limited 2018
