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ECB determined to press on with bond purchases: Sept minutes
[FRANKFURT] European Central Bank rate setters agreed when they met in September that the eurozone's economy needs continued monetary stimulus and that underlying price growth showed no sign of a strong recovery.
Minutes of the Sept 7-8 meeting showed on Thursday there was wide agreement among the 19 national governors and six members of ECB's executive board that they had to keep borrowing costs low to support growth and inflation.
"It was therefore of crucial importance to preserve the very substantial degree of monetary support that was embedded in the staff projections, while it was also cautioned that the Governing Council should not be unduly influenced by prevailing market expectations," the minutes said.
Bond markets have been rattled by speculation the ECB might reduce the pace of its bond purchases, currently at 80 billion euros (S$122.33 billion) per month, although the central bank says that has not been discussed by its policymakers.
Speaking in New York on Thursday, ECB Chief Economist Peter Praet said withdrawing stimulus early would stall the economic recovery.
"The gradual return of our economy to a balanced growth path ... would most likely be stalled and reversed if the monetary expansion that is presently embodied in credit conditions were to be withdrawn prematurely," he said.
According to the minutes, the Governing Council members noted underlying inflation, which is stripped of its more volatile components like energy and is sometime seen as a better indicator of economic health, "was still not showing convincing signs of a sustained pick-up".
The policy makers also flagged downside risks to the ECB's growth and inflation forecasts, citing Britain's decision to leave the European Union as an example. Some members noted projections had been overly optimistic in the past.
In this context, the ECB's decision makers reiterated their willingness to act to bring inflation back to their target of almost 2 per cent "without undue delay" and "using all instruments".
This included addressing a potential shortage of eligible bonds, flagged by board member Benoit Coeure during his presentation to the Council.
"It was underlined that the Governing Council could adjust the parameters of the programme at any time to achieve the intended amounts," the ECB said in the minutes. "There should be no doubt about the Governing Council's determination to execute its asset purchases in line with its past decisions and to adopt further measures, if needed, to fulfil its price stability objective."
ECB President Mario Draghi said after the Sept meeting the bank would look at ways to ensure the bond purchases could carry on smoothly.
The minutes contained no indication as to what these options may be but Mr Praet has said any change to the scheme had to be judged based on its effectiveness for monetary policy.
Market analysts have speculated the ECB could buy equities but this move would have a limited impact on the real economy as the stock market only accounts for a small portion of the euro zone's corporate sector.
Sources told Reuters earlier this year the ECB would likely consider raising a limit on how much of each bond it can buy or relaxing a rule that stops it from buying bonds that yield less than its deposit rate, currently at -0.40 per cent.
These changes would help the ECB buy more of the negative-yielding short-term German paper that analysts fear it will run out of.
ECB rate setters acknowledged the sluggish eurozone recovery was dragged down by some factors beyond their reach, such as technological advances and an aging population.
"Members felt that the reasons behind the hesitant recovery in business investment needed to be better understood in conjunction with persistently high corporate savings, the role of uncertainty and other factors, such as technology and demographic developments," the ECB said in the minutes.
Although super low rates by the likes of the ECB have cut funding costs and all but wiped out incentives to save, borrowing by businesses and households in many places remains stubbornly low, with lending growth close to 2 per cent in the eurozone.
That suggests the monetary transmission mechanism has broken down, at least in part, and the ECB will not get the anticipated "bang" for the trillion-plus of dollars it has spent buying assets.
In addition, ECB policy makers said globalisation was keeping the price of some industrial goods low, meaning any long-term pick-up in eurozone inflation depended on services - a sector where productivity and wage growth is low .