By Francesco Canepa
FRANKFURT (Reuters) - European Central Bank policymakers worried about an excessive rise in the euro when they met on July 20, warning that favourable financing conditions in the bloc still depended on the ECB's own easy policy stance, minutes of the meeting showed on Thursday.
A recent bounce in the euro, which is making euro zone exports less attractive and imports cheaper, has been singled out by investors as the biggest threat to the ECB's efforts to revive inflation in the bloc.
The minutes lay bare policymakers' nerves after a hint at policy changes by ECB President Mario Draghi in June sent the euro and bond yields rising, effectively undoing some of the ECB's work in depressing borrowing costs and weakening the currency.
Minutes of the July meeting showed that rate-setters were highly aware of this risk as they decided against any change to their pledge for continued monetary stimulus, worried that even the slightest change in their language could lead to over-interpretation, raising premature market expectations.
"Concerns were expressed about a possible overshooting in the repricing by financial markets, notably the foreign exchange markets, in the future," the ECB said in the accounts.
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"It was underlined that the still favourable financing conditions could not be taken for granted," the ECB added. "Caution was expressed that, in the present financial market environment, markets were particularly sensitive to incoming information."
Investors are impatient to find out what the ECB plans to do with its 2.3 billion euros bond-buying programme, scheduled to run until December and widely expected to be gradually wound down next year.
But ECB policymakers meeting in July said the duration and pace of the purchases were not the only available levers to adjust their stance and "more policy space" was needed "in either direction" if needed.
They emphasised markets were sensitive to new information and batted back a suggestion to adjust the ECB's guidance, which includes a pledge to increase bond purchases from their current 60-billion-euros monthly pace if needed, out of fear of a market backlash.
"It was generally judged paramount at this stage to avoid sending signals that could be prone to over-interpretation and might prove premature," the ECB said.
The rate setters acknowledged "some tentative signs of a pick up" in underlying inflation, which excludes the more volatile food and energy prices, but did not see "conclusive evidence" of a sustained rise.
(Reporting by Francesco Canepa; Editing by Balazs Koranyi and Toby Chopra)