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Brexit vote creates 'headwinds': ECB minutes

The U.K.'s vote to leave the European Union (EU) has created "headwinds" for the region, minutes from the European Central Bank (ECB)'s latest policy-setting meeting said.

"New headwinds had emerged from the outcome of the U.K. referendum and uncertainty had risen, relating also to other geopolitical developments and the financial market situation," the minutes, published on Thursday, stated.

The minutes showed ECB members felt, however, that it was too early to judge the impact on the 19 euro zone economies.

"More time was needed to assess the incoming information over the coming months, although downside risks had clearly increased," the minutes said.

A euro sign in front of the Headquarters of European Central Bank in Frankfurt.
Oed | Ullstein bild | Getty Images
A euro sign in front of the Headquarters of European Central Bank in Frankfurt.

The euro marginally pared gains after the minutes were out, but remained above $1.13. The pan-European STOXX 600 index crept slightly higher.

Capital Economics said the minutes appeared to show the ECB was prepared to loosen policy further. The research firm forecasts the ECB would up the pace of its monthly asset purchases to 90 billion euros ($102 billion) from 80 billion euros, extend the purchasing program by six months and cut the deposit rate to -0.5 percent in September.

"It is quite possible the bank will hold at least one of these measures back for later, but we are convinced that all three will be needed before long," Jennifer McKeown, European economist at the firm, said in a report on Thursday.

However, data since the U.K. stunned financial markets by voting to quit the EU on June 23 have failed to clearly indicate a hit to other European economies.

Euro area inflation averaged 0.2 percent in July, according to official data from the European Commission. This was an acceleration from 0.2 percent in July, but far below the targeted "below, but close to 2 percent."

Meanwhile, Markit's euro zone composite purchasing managers' index (PMI) showed economic expansion accelerated in July from June. This was driven by economic growth in Germany, Europe's biggest economy.

"The fact that the financial market response has continued to be muted and that business surveys have been little changed since then might suggest that there is no need for further loosening. However, we now know that GDP growth slowed quite sharply in the second quarter," McKeown said.

Meanwhile, with sovereign bond yields at record lows — and bond prices therefore at highs — there are concerns the ECB may be struggling to meet its monthly asset-purchase target. Therefore, there is speculation the ECB might abolish the yield floor on bonds it can purchase, the issue limit applied to individual bonds or add assets to the list of securities it is allowed to buy.

Any changes will not been made until after the ECB's next monetary policy meeting, which will take place on September 8 in Frankfurt.

The U.K.'s Bank of England unveiled a battery of stimulus measures two weeks ago in an attempt to smooth the economic shock from the vote. These included cutting interest rates for the first time in seven-and-a-half years and relaunching its bond-buying program. The move was viewed by some analysts as increasing the likelihood of the ECB extending the scope and duration of its own asset-purchasing program.

The main consideration though will be the economic data out since its last meeting, particularly inflation, as the ECB has a single mandate to maintain price stability.

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