ECB took more upbeat view in December meeting, minutes show

European Central Bank policymakers took a more upbeat view on economic developments in their December 12th meeting, but continued to see an abundance of risk that warrant ultra-easy policies, the accounts of the meeting showed on Thursday.

The bank left policy unchanged in Christine Lagarde’s first meeting as its president, but noted that political risk may be ebbing, inflation pressures seem to be building and the region’s vast manufacturing sector was showing signs of bottoming out, all suggesting that the worst of the recent slowdown may be over.

The ECB has been trying to boost growth and inflation as the region is still working to overcome the lingering effects of a debt crisis that started nearly a decade ago and came close to tearing apart the currency union.

“Incoming data since the last monetary policy meeting pointed to continued weak but stabilising euro-area growth dynamics,” the accounts of the meeting quoted ECB chief economist Philip Lane as saying. “Measures of underlying inflation remain generally subdued, although there were some indications of a mild increase.”

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The 13-page document, however, made only a brief mention of the ECB’s upcoming policy review, a one-year deep dive that is likely to set course for the bank over much of the next decade and dominates investors’ interest.

“It was also suggested that some broad guidance be communicated about the forthcoming strategy review, including the likely timeline, although it was generally seen as advisable to refrain from public discussion on the strategy prior to the envisaged launch of the review,” the ECB said.

The review, which is expected to provide clearer definition of the inflation target and the ECB’s tolerance for any deviation from it has been in the focus since Lagarde took over on November 1st and is expected to dominate ECB-related news flow.

Negative rates

Batting back lenders’ complaints that negative rates are hurting the bank sectors, policymakers argued that the net effect of ECB policies remained positive.

While negative rates were compressing net margins, lending volumes were higher and stronger economic growth kept provisioning levels down.

The ECB added that while interest rates on much of banks’ deposit funding could not go below zero, an increasing number of corporate deposits were remunerated at negative rates, also helping margins.

The ECB will next meet on January 23rd, when it is expected to kick off the policy review.

With stimulus already provided through bond buys, negative rates and ultra-cheap bank loans, the ECB is expected to keep policy unchanged for most of this year, especially since any big change during a policy review is likely to be controversial. – Bloomberg