Governors of the European Central Bank in March cast doubt on any risk of overheating in the eurozone economy, a key element used to gauge inflation, according to minutes of their last meeting published on Thursday. During the regular monetary decision meeting, some members of the governing council found that there was "considerable measurement uncertainty" in several institutions' assessments of the eurozone's output capacity. The European Commission as well as the OECD have given upbeat assessments predicting that any slack in production capacity would be filled at the end of 2017 or early 2018.
But according to the minutes, a "certain number of arguments were put forward suggesting that greater slack might remain in the economy than indicated in the baseline projections." In fact, "there could be more spare capacity in the economy than was currently implied by traditional measures".
This could explain why inflation has remained stubbornly below the target of just under 2.0 percent set by the ECB, despite an economic recovery in the eurozone. Inflation is a key indicator guiding the ECB in determining its monetary policy. Meanwhile, the governors also expressed alarm over a looming trade war between the United States and China. "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," according to the minutes.
"The impact on the global economy and on the euro area would ultimately depend on the scale of import tariffs imposed by the United States, as well as the scope of any retaliatory measures. "However, it was also cautioned that negative confidence effects could arise." The next monetary policy meeting of ECB governors will be held on April 26.