Meeting Account Shows ECB Content with Expectations, Keen on New Data

20 August 2020

By David Barwick – FRANKFURT (EconoStream) – The account of the European Central Bank’s policy meeting of 15-16 July, released by the ECB on Thursday, showed the Governing Council to consider market expectations consistent with the intentions of monetary authorities and to be keen on getting additional information on economic developments after the summer.

According to the account, the Council took the view that the ECB should not encourage speculation about additional policy moves, even while reiterating its willingness to take such if warranted.

Council members ‘agreed that, although the monetary policy stance was being left unchanged, communication was of particular importance at present’, with some of them favouring ‘a steady hand regarding communication, as market expectations appeared to be well aligned with the Governing Council’s intentions.’

The view was expressed that there was somewhat less uncertainty than there had been at the June monetary policy meeting, though risks were still seen as tilted to the downside overall. The Council felt that communication should reflect this and thus recognize recently better data while making clear the risks still faced.

This led to ‘broad agreement’ to leave communication intact, the account said.

The Council considered it important to stress anew its willingness to exploit the built-in flexibility of the pandemic emergency purchase programme (PEPP) as warranted by market conditions, as well as its readiness ‘to act, with all of its instruments, as appropriate, to ensure the necessary degree of monetary accommodation.’

At least one member reminded colleagues that ‘the capital key provided the benchmark for the allocation of purchases’ under the PEPP, and at least one member proposed that the total €1.350 trillion volume of the PEPP ‘be considered a ceiling rather than a target’, arguing that ‘incoming data had surprised on the upside and some of the downside risks [in June] had receded, increasing the possibility that the envelope might not have to be deployed fully.’

That view apparently failed to prevail, however, against the dominant sentiment that ‘in the absence of any significant upside surprises to the medium-term inflation outlook, the current presumption was that the PEPP envelope would have to be used in full.’

Indeed, ‘[i]t was stressed that the Governing Council should make clear that the full PEPP envelope remained available’, the account stated. ‘While it was underlined that the Governing Council should avoid creating new expectations of further monetary policy action, it should also emphasise that it had the tools and policy space to take further action if needed.’

The account indicated that Council members looked forward to the additional information that would become available after the summer, as the economy’s rebound so far could not necessarily be extrapolated into the future. Also, emergency fiscal measures would come to an end, so that the unfiltered effect of the pandemic-related crisis on firms would become more apparent.

Further information was also called for with respect to the third series of targeted longer-term refinancing operations (TLTRO III), the account revealed. The desire was expressed for ‘a better picture’ of the use made of the €1.3 trillion take-up by banks at the first allotment, which took place in June,

‘Looking ahead, additional information, including more hard data releases, new staff projections and news on fiscal measures, would become available by September’, the account said. ‘This would provide more clarity regarding the medium-term inflation outlook.’

‘In any case, at its September meeting the Governing Council would be in a better position to reassess the monetary policy stance and its policy tools’, it said.