European Central Bank policymakers raised concern over the appreciation of the euro in July, pointing out the risk of the exchange rate overshooting in the future, and stressed that the favorable financing conditions are still supported by the massive stimulus.
"Concerns were expressed about a possible overshooting in the repricing by financial markets, notably the foreign exchange markets, in the future," the bank said in the minutes, which it calls "the account", of the July 20 rate-setting session released on Thursday.
"The still favorable financing conditions could not be taken for granted and relied to a considerable extent on a continued high degree of monetary policy accommodation."
ECB President Mario Draghi's comments at a banking forum in Portugal late June fed market expectations of an imminent tapering and send yields and the euro soaring.
Given such a response, policymakers have been very careful with their words so as to avoid the kind of market turbulence dubbed "taper-tantrum".
Draghi and his colleagues are expected to drop any hint of a gradual withdrawal of stimulus, or tapering, in September and an actual decision in October. Economists expect that a possible tapering would only start in January after the end of the on-going round of asset purchases.
"The case was made for proceeding gradually and prudently when approaching adjustments in the monetary policy stance and communication in line with the Governing Council's evolving assessment," the minutes revealed.
"Caution was expressed that, in the present financial market environment, markets were particularly sensitive to incoming information."
While the improving economic environment could boost forward-looking financial variables, there was a risk that tightening in financial conditions could surpass the impact of better growth and inflation outlook.
"Looking ahead, the Governing Council needed to gain more policy space and flexibility to adjust policy and the degree of monetary policy accommodation, if and when needed, in either direction," the minutes said.
During the July session, a suggestion was made to consider an incremental adjustment in the language on forward guidance to avoid any misalignment between the Governing Council's communication and its assessment of the state of the economy.
However, this was turned down as "it was generally judged paramount at this stage to avoid sending signals that could be prone to over-interpretation and might prove premature."
ECB rate-setters agreed on the need to strike a fine balance between expressing justified confidence in the economic expansion and underlining the need for monetary policy to remain persistent and patient.
Though economic expansion had strengthened and risks to the growth outlook were broadly balanced, it is yet to translate into stronger inflation dynamics, the minutes said.
by RTT Staff Writer
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