European Central Bank policymakers have expressed concern over the risk of a full-fledged trade war with the United States and fretted over the potentially harmful impact of the euro’s strength, the minutes of their recent meeting showed. With the euro zone economy growing for five straight years, policymakers are now debating how to wean the bloc off easy money and prepare investors for normalising policy a decade after the global financial crisis sent central banks into crisis mode.
The ECB has so far moved by increments to dial back support. In March, it gave up a largely outdated pledge to raise asset buys if needed, a symbolic move that kept it on course to end its 2.55 trillion asset purchase program by the end of this year. While the euro’s firming in recent months, partly due to fears over U.S. protectionism, has not significantly curtailed demand, policymakers called the exchange rate a “significant source” of uncertainty with some predicting a more negative impact on inflation.
Investors have been wondering whether the ECB’s carefully calibrated exit plan from its ultra-easy policy could be scuppered by a looming trade war between the United States and China although ECB policymakers have so far played down this risk.
“There was widespread concern that the risk of trade conflicts, which could be expected to have an adverse impact on activity for all countries involved, had increased,” the ECB said. “It was also cautioned that negative confidence effects could arise.”
Sterling soared to a nine-month high against the euro on Thursday after European Central Bank policymakers expressed concern about the impact of a trade war with the United states and the potentially harmful impact of the euro’s strength.
The announcement helped strengthen sterling to its strongest since June 9, its biggest one-day gain against the single currency since January. Markets expect the Bank of England to raise rates next month as it tries to curb inflation, although the probability of a hike happening has fallen to 66 percent from more than 70 percent in previous weeks after some recent British economic data was weaker-than-expected. Most analysts still expect the bank to increase rates, as Brexit-related risks had subsided for now and wage data still pointed upwards.