Minutes from the ECB’s most recent policy meeting reveal that Mario Draghi and company have a number of concerns about the pace of economic growth in the euroarea and about the outlook for inflation which, much to the governing council’s surprise, "remains unusually low."
Board members also took note of increasingly volatile EGB markets and made special mention of the second bund VaR shock which took place at the first of June, something the central bank attributes to "overvaluation [and] one?way market positioning related to the public sector purchase programme." In other words: "our bad."
The bank gave itself the now customary pat on the back for the "success" of PSPP noting that the "moderate frontloading of purchases" (a reference to the effective expansion of QE that was leaked to a room full of hedge funds at an event in May) was going smoothly, other than the above-mentioned nasty bout of extreme volatility.
As for the economy and inflation, well, that’s not going so hot. "Overall, the recovery in the euro area was expected to remain moderate and gradual, which was considered disappointing from both a longer-term and an international perspective [while] consumer price inflation had remained unusually low."
Between that rather grim assessment and the comments cited above regarding volatility, one is certainly left to wonder what it is exactly about PSPP that’s going so "smoothly."
But as interesting as all of that is (or isn’t), the most compelling comments were related to China. Here’s the excerpt:
In particular, financial developments in China could have a larger than expected adverse impact, given this country’s prominent role in global trade.
Consider that, and consider the following statement sent to Bloomberg by an adviser to Japanese PM Shinzo Abe:
If [the Chinese move to devalue to yuan] suppresses external demand in Japan too much, the BOJ may further relax monetary policy.
Clearly, the ECB meeting took place ahead of China’s FX shocker, so the governing council’s reference to "financial developments in China" likely referred to the stock market collapse that was unfolding at the time, but the takeaway is the same: if developments in China’s financial markets serve to further undercut Japan and Europe’s quest to boost growth and stoke inflation (i.e. if China succeeds in exporting its deflation to trading partners), more QE and more easing will be just around the corner.