FRANKFURT The euro zone economy may be improving, but a change in the European Central Bank's policy guidance could backfire, tightening financial conditions, policymakers concluded at their March 9 meeting, the minutes of the discussion showed on Thursday.
Still, the risk of a negative scenario has receded, so a nuanced shift in communication was warranted to convey a more positive tone, even if a substantial degree of accommodation was still required to raise inflation back to target, policymakers concluded.
Though the ECB kept its stance and message unchanged at the March meeting, this nuanced shift - the removal of a reference to being ready to act with all available instruments - was taken by markets as a hawkish shift, with some considering it as a signal for earlier-than-expected policy normalization.
Bond yields rose after the meeting as investors brought forward their prediction for the ECB's first interest rate increase in years, even as policymakers tried to cool those expectations, arguing that they merely signaled reduced risk, not quicker normalization.
Indeed, ECB President Mario Draghi and Chief Economist Peter Praet both suggested on Thursday that the bank will stick to its well telegraphed policy path, including for bond buying and record-low rates, for some time to come, as they are not yet convinced the euro zone economy is back to rude health.
"Changes in the formulation (of the guidance) at the current juncture could lead to an undue upward shift in market interest rates and tighten financial conditions to an extent that was not warranted by the prevailing outlook for price stability," the minutes showed.
The ECB added that there was broad agreement in maintaining the bank's guidance, even if some policymakers have suggested that the outlook has improved enough to drop the reference to lower rates.
"Removing the downward bias on interest rates in the present formulation of the Governing Council's forward guidance was seen as premature, as there was still considerable risk surrounding the economic outlook and the robustness of inflation convergence," the minutes showed.
But policymakers also wanted to indicated improved confidence in the outlook.
"Nuances in communication could convey a more positive tone on the state of the euro zone economy, while signaling less urgency for further monetary policy action," the minutes said.
(Reporting by Frank Siebelt)