ECB officials agreed that the risks to the Euro Area outlook could still be assessed as broadly balanced, but that the balance of risks was moving to the downside owing to the persistence of uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial volatility, minutes of the ECB's December meeting showed. Policymakers also suggested revisiting the contribution of TLTRO to the monetary policy stance moving ahead.
Excerpts of the account of the monetary policy meeting of the Governing Council of the European Central Bank, held in Frankfurt am Main on Wednesday and Thursday, 12-13 December 2018:
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Members discussed in greater detail the risks to the euro area growth outlook. Uncertainties and risks related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial volatility had remained prominent. It was widely considered that uncertainty persisted or had increased, with risks to activity moving to the downside. It was also argued that, even though certain downside risks – regarding trade tensions, emerging markets, US monetary policy and developments in sovereign bond markets in the euro area – had receded, the continually changing nature of risks would sustain – or even increase – general uncertainty.
In this context, it was underlined that the situation remained fragile and fluid, as risks could quickly regain prominence or new uncertainties could emerge. The situation in emerging markets was cited as an example, with vulnerability related to some countries becoming less of a concern (notably with Turkey and Argentina stabilising), while vulnerability related to others was already looming. Other examples were the frequently changing state of discussion on trade issues and the withdrawal of the United Kingdom from the European Union. Against this background, it was argued that the current environment could be described as one of “risk rotation” in a state of generally heightened uncertainty.
As regards the balance of risks, on the one hand, the view was expressed that a case could be made for assessing risks to activity as tilted to the downside. Prevailing uncertainty appeared to have affected confidence, although the latter was coming down from high levels. Reference was made to a recent deterioration in business confidence, with PMI survey data related to production and exports again disappointing. This was seen as affecting business investment and cautioned against being complacent about downside risks to growth. Regarding the Eurosystem staff macroeconomic projections, it was noted that there had now been three successive downward revisions to the short-term euro area baseline growth outlook over the past half-year. The latest revisions essentially reflected the incorporation of new data regarding the short term but had no bearing on the growth path for the remainder of the projection horizon. Therefore, it was argued that, unless all shocks affecting the latest figures were considered to be of a purely temporary nature, this should have moved the balance of risks to the downside.
On the other hand it was argued that, while there had recently been somewhat more negative news than positive news, this had been incorporated in the downward revision to the baseline Eurosystem staff projection, such that the balance of risks pertaining to this new projection could be maintained as fairly balanced. It was also remarked that the assessment of still balanced risks to growth was supported by the emergence of new upside risks, namely a further decline in oil prices since the cut-off date for the projections and the likelihood of more stimulus coming from fiscal measures. Against this background, caution was expressed against moving the balance of risks to the downside.