Policymakers described the "Brexit" referendum as a major source of uncertainty for the euro area economic outlook and warned that the impact from a decision by the U.K. to leave the European Union would be significant, the minutes of the June 1-2 European Central Bank rate-setting session showed Thursday.
In the June 23rd referendum, 52 percent Britons voted to leave the EU in a historic and surprise move.
"There was general agreement that this was an important source of uncertainty as regards the economic outlook, and in the event that the United Kingdom voted to leave, i.e. a "Brexit", there could be significant, although difficult to anticipate, negative spillovers to the euro area via a number of channels, including trade and the financial markets," the report, which the ECB calls "accounts" said.
"At the same time, it was noted that there might also be an upside risk to the euro area outlook if the United Kingdom voted to remain part of the European Union."
In the June meeting, the ECB left its key interest rates unchanged for a second consecutive policy session, after lowering them in March. The bank also raised the euro area growth and inflation forecasts for this year.
The report also showed that ECB policymakers viewed "the increased prospects of an interest rate hike in the United States were seen as a positive signal for the global economy".
"If, on the basis of incoming data, the FOMC were to raise interest rates at one of its forthcoming meetings, this would suggest that the US economy was experiencing a stronger recovery, which in turn could be expected to have a positive effect on "animal spirits" and confidence globally," the ECB minutes said.
However, the unexpected "Brexit" vote complicated plans for the ECB as well as the Federal Reserve, dampening hopes of a interest rate hike from the latter.
Regarding the Eurozone, the ECB rate-setters agreed that the economic recovery was broadly proceeding as expected, at a steady pace, largely driven by domestic demand, and supported by the monetary policy measures.
"There was broad agreement that the balance of risks to the euro area growth outlook had improved on the back of monetary policy measures taken and the stimulus still in the pipeline," the minutes said.
ECB policymakers also expected additional stimulus from its measures that were to be implemented later in June. The bank began purchasing corporate bonds in June, under its asset purchase plan to buy EUR 80 billion bonds a month.
In March, the bank also announced a second round of targeted longer-term refinancing operations, dubbed TLTRO II, with a maturity of four years. The first of the four auctions under the programme was held in June, in which about EUR 399 billion was lent.
"With regard to the series of TLTRO II operations, it was recalled that the earlier operations had been instrumental in turning around the credit cycle in the euro area and in reducing fragmentation, and that the new operations should also help to support lending and, ultimately, inflation expectations," the minutes said.
by RTT Staff Writer
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