Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt am Main on Wednesday and Thursday, 11-12 September 2019.
ENPNewswire-October 11, 2019--Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt am Main on Wednesday and Thursday, 11-12 September 2019
(C)2019 ENPublishing - http://www.enpublishing.co.uk
Release date- 10102019 - Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt am Main on Wednesday and Thursday, 11-12 September 2019.
-
Review of financial, economic and monetary developments and policy options
Financial market developments
Mr Coeure reviewed the financial market developments since the Governing Council's previous monetary policy meeting on 24-25 July 2019. Global financial markets had undergone a strong correction over the summer, which bore a close resemblance to the episode observed during the spring. The principal catalyst on both occasions was an intensification of global trade tensions.
The yield on the ten-year German government bond had declined by around 35 basis points, compared with the day before the July meeting, to -71 basis points. The ten-year US Treasury yield had fallen by around 50 basis points.
Mr Coeure highlighted three key aspects to help interpret these developments. The first related to the response of real interest rates, which was different from the spring episode. The large decline in real rates in August could be interpreted as a sign that market participants were becoming increasingly concerned about the cumulative impact of the sequence of trade shocks on the global economy.
The second point was whether there were signs of an effective lower bound gradually inducing non-linearity in the market reaction to shocks. Although the starting level of the ten-year German government bond yield prior to the August correction had been much lower than in the spring, and was already in deep negative territory, the order of magnitude of the decline had been similar in both episodes. There were no signs in this regard of downward rigidities in long-term rates that could relate to the effective lower bound. The EONIA forward curve had also continued to shift lower during August, pricing in a cumulative cut of almost 40 basis points in the rate on the ECB's deposit facility by early 2021. However, lower money market trading volumes for longer tenors suggested that the conviction about cuts significantly deeper into negative territory was not broad-based and uncertainty over the future path of short-term policy rates remained elevated.
The third aspect related to possible changes in portfolio rebalancing in response to the increase in the share of bonds that were trading at negative levels. A first development related to recent movements in the spread between the ten-year German Bund and the overnight index swap (OIS) rate, which until recently had been a reliable gauge of scarcity effects in the Bund cash market. However, since mid-July, there had been a notable reversal in the spread, despite growing scarcity in the cash market, to levels last seen towards the end of 2016. Market intelligence suggested that the reversal might primarily be related to hedging activities that were increasingly being conducted in the swap market rather than in the cash bond market. The second novelty in asset price responses was a flattening of the very long end of the yield curve, as evidenced by the narrower yield spread between 10-year and 30-year German government bonds. In August, for the first time, the entire German sovereign yield curve had moved into negative territory. The third novelty related to the marked and persistent rise in the price of gold, which coincided with the sharp increase in the share of bonds that were trading at negative levels.
Moving to the equity markets, the impact of the renewed trade tensions in August had been visible particularly in emerging markets. In the euro area and in the United States, the impact had been much more muted, with the decline in bond yields partly offsetting the rise in the equity risk premium.
As regards foreign exchange markets, the weakening of emerging market currencies contributed to a mild appreciation of the euro in nominal effective terms.
The global environment and economic and monetary developments in the euro area
Mr Lane reviewed the global environment and recent economic and monetary developments in the euro area.
Regarding the external environment, survey data pointed to subdued activity in the third quarter. Services, although weakening, had continued to support growth, while manufacturing activity had decelerated further. Trade tensions had sparked a risk-off sentiment, especially in emerging market economies. In the United States, economic activity was slowing - most clearly evidenced in investment - but remained solid. In China, the slowdown in economic activity was accentuated by new tariffs, while in Japan the growth momentum was set to decelerate and inflation remained subdued. In the United Kingdom, the risk of a no-deal Brexit was increasing, while economic activity had stalled. Overall, risks to global activity and trade remained on the downside.
Oil prices had dropped by 8% in August. As regards exchange rates, since the Governing Council's July monetary policy meeting the euro had been essentially flat, depreciating by -1.2% in bilateral terms against the US dollar but appreciating by 0.7% in nominal effective terms.
Turning to the euro area, information available since the July monetary policy meeting signalled a more protracted weakness in euro area growth dynamics, mainly driven by the external sector. Eurostat's second release of 6 September put real GDP growth in the second quarter of 2019 at 0.2% in quarter-on-quarter terms. With regard to developments in the third quarter so far, while the Economic Sentiment Indicator and the Purchasing Managers' Index had edged up in August, taking July and August together they had, on average, been lower than in the second quarter, suggesting a continuation of subdued growth. As regards sectoral developments, the exceptional divergence between manufacturing and services had persisted, reflecting the trade shock that the euro area currently faced, which predominantly affected the manufacturing sector.
Domestic demand had, on the whole, remained resilient and continued to be underpinned by a solid labour market, household confidence, improving balance sheets and policy stimulus. Real private consumption had expanded by 0.2% in the second quarter of 2019, following an exceptionally strong increase of 0.4% in the first quarter. Households continued to signal optimism about their future financial situation. In line with this, retail trade had continued to grow at an overall robust pace. Regarding housing investment, growth was expected to remain supported both from a demand and a supply-side perspective. Business investment had been slowing since early 2018 and the latest indicators suggested a continuation of subdued business investment in the short term. As regards the labour market, employment had grown by 0.2% in quarter-on-quarter terms in the second quarter of 2019, down from 0.4% in the first quarter. Looking ahead, the PMI employment component pointed to a further moderation in employment growth.
These developments were also reflected in the September 2019 ECB staff macroeconomic projections for the euro area, which projected real GDP growth at 1.1% in 2019, 1.2% in 2020 and 1.4% in 2021. Compared with the June 2019 Eurosystem staff projections, real GDP growth had been revised down by 0.1 percentage points for 2019 and by 0.2 percentage points for 2020, while it was unrevised for 2021. The revisions were mainly on account of weaker external demand, which was somewhat cushioned by the impact of lower energy prices and the easing of financial conditions. Over the medium term, the baseline assumed a gradual dissipation of global headwinds, allowing fundamental factors supporting the euro area expansion to regain traction. The outlook was supported by the ECB's very accommodative monetary policy stance, improving labour markets and relatively robust wage growth and net worth, as well as by declining unemployment, rising profits, a loosening fiscal stance and a recovery in foreign demand. Nevertheless, GDP growth was expected to slow towards the end of the projection horizon, as declining capacity utilisation, a prolonged period of low business confidence and the expiration of tax incentives adversely affected investment. Moreover, labour supply constraints restricted employment growth. Projections from other institutions and the private sector were in line with the September 2019 ECB staff projections.
Turning to euro area price developments, according to Eurostat's flash estimate of 30 August, both annual headline HICP inflation and HICP inflation excluding food and energy had moved sideways in July, at 1.0% and 0.9% respectively. Measures of underlying inflation remained muted and indicators of inflation expectations were stagnating. Wage growth remained solid, increasing at rates around long-term averages. Compensation per employee had increased by 2.1% in annual terms in the second quarter of 2019, while compensation per hour had increased by 2.2%. Negotiated wage growth continued to stand above its 2018 level in the first half of 2019.
Since the first quarter of 2018, unit labour cost growth had risen strongly. Between the first quarter of 2018 and the second quarter of 2019 it had more than doubled, increasing from 1.0% to 2.1%. This reflected the decline in labour productivity growth over the same period, in turn a reflection of the resilience of the labour market in the face of slowing GDP growth. Strengthening unit labour cost pressures had so far been largely absorbed by profit margins.
In the September ECB staff projections, HICP inflation had been revised down over the whole projection horizon and was projected to reach 1.5% in 2021. The...
To continue reading
Request your trial