The euro / dollar rate weakened from 1.1208 to 1.1181 in the hour after the release of the European Central Bank’s (ECBs) April Monetary Policy Meeting Minutes
The Minutes did little to dispel the possibility that the ECB might have to use more stimulus to counteract deflationary forces in the future, and reiterated that risks to growth remaining tilted to the downside
On the upside, however, they repeated the mantra that the region continued along a ‘wheelchair-safe’ upward gradient of growth, and given some major ‘hardware’ from March’s stimulus arsenal had not yet been depoyed its effectiveness could not yet be judged.
In the words of an unnamed source close to the markets: “it’s working” (the measures), and added:
“I think they are delighted with the spreads compression. Even non-investment grade debt is getting a lift.”
The main points from the documnent were as follows:
Firstly, the ECB, unequivocally left the door open for more stimulus if required:
“It was essential to preserve an appropriate degree of monetary accommodation for as long as needed, reiterating the forward guidance on interest rates and the APP (Asset Purchase Programme).
“It was also important to reiterate that the Governing Council would continue to monitor closely the evolution of the outlook for price stability and, if warranted to achieve its objective, act using all the instruments available within its mandate.”
Secondly, that gradual growth continued to be the best way of describing the economic trajectory of the region:
“If growth for the first quarter of this year were to materialise in line with expectations, this would constitute the twelfth consecutive quarter of positive economic growth for the euro area and the seventh quarter in a row of growth above potential.
“As a consequence, the output gap was closing, albeit only very gradually.”
Risks to growth, however, remained, on balance, tilted to the downside:
“At the same time, the risks to the euro area growth outlook still remained tilted to the downside.
“Inflation dynamics remained weak and annual HICP inflation could turn negative again in the coming months, before picking up in the second half of 2016 and recovering further in 2017 and 2018, supported by the ECB’s monetary policy measures and the expected economic recovery.”
Further, not all the instruments announced to increase stimulus at the April meeting had been implemented, such as for example the Corporate Bond Buying Programme and the Cheap long-term refinancing loans at Euro-area banks. As such it was impossible to judge their effectiveness:
“It needed to be recalled that it was not just the announcement effects that had an impact, but also the implementation phase, which had not yet begun in the case of these latest measures.
“Hence, further monetary policy stimulus was still in the pipeline, notably from the CSPP (Corporate Sector Purchase Programme) and TLTRO II (Targeted Long Term Refinancing Operations), which were set to start in June 2016.”
Finally the ECB 'closed ranks' against crticism from 'individual member states' (ie Germany), reasserting its independence and actually marginally increasing the possibility of further stimulus (since Germany was against further stimulus):
"Finally, it was underlined that the Governing Council was unanimous in its commitment to deliver on its mandate and on the appropriateness of an expansionary monetary policy stance.
"In the light of recent public criticism that had appeared to link the ECB’s decisions to developments in the political sphere in a Member State, it was viewed as important to reaffirm collectively the independence of the ECB in the pursuit of its mandate."