ECB Meeting Account Sees Prior Steps as Adequate, Deserving More Time to Work

18 February 2021

By David Barwick – FRANKFURT (Econostream) – The account of the European Central Bank’s policy meeting of 13-14 January, released by the ECB on Thursday, indicated that Governing Council members were unanimous about the decision to reconfirm their policy recalibration of six weeks previously, viewing existing measures as adequate to the situation.

According to the account, against the backdrop of staff growth projections seen as still largely valid, the Council deemed it necessary that financing conditions remain favourable, with some concerns about possible interference from a strong euro.

Overall, Council members recognized various elements of the environment justifying greater optimism, but continued to view the inflation outlook as fundamentally inconsistent with complacency.

‘All members agreed with [Chief Economist Philip] Lane’s proposal to reconfirm the existing monetary policy measures’, the account said. ‘It was argued that monetary policy should keep a steady hand and that the measures that were put in place in December should be given time to take full effect.’

On the one hand, the existing measures were seen by meeting participants as ‘appropriate in view of the current outlook’, the account said. On the other, Council members were cognizant of the fact that the existing measures ‘were also designed to react flexibly and equally to either potentially less favourable developments or upside surprises.’

However, the account conveyed a cautiously optimistic attitude of ‘less pronounced’ downside risks, underpinned by the assessment that the economic outlook was ‘evolving broadly in line’ with the December forecasts. Moreover, ‘some uncertainties regarding the international developments had been resolved in a more positive way than expected’, the account noted.

To broad agreement, Lane drew attention to ‘positive news on the evolution of trade and growth in China and other Asian economies; to the additional US fiscal stimulus package and the final results of the US elections, which could lead to substantial further fiscal stimulus; and to the successful conclusion of an EU-UK trade agreement.’

At the same time, Council members realized the ongoing potential for the pandemic and the public health policy response to undermine the recovery globally, with ‘the risk of more protracted containment measures … rising amid the emergence of more infectious mutations of the virus and a pace of vaccination that was proceeding more slowly than expected.’

As well, a likely increase in inflation over the near term was seen in the context of partly one-off causes and of underlying price pressures that ‘were expected to remain muted owing to weak demand – notably in the tourism and travel-related sectors – as well as to low wage pressures and the appreciation of the euro.’

In this respect, the euro’s strength was highlighted as an additional potential complication. ‘Concerns were voiced … over developments in the exchange rate that might have negative implications for euro area financial conditions and, ultimately, consequences for the inflation outlook’, the account said.

Indeed, the account observed that the euro’s strengthening ‘had already had a negative impact on inflation, although it was also highlighted that the impact of exchange rate movements on inflation might be overestimated in standard models.’

With the projected path of inflation still ‘distant from the … medium-term inflation aim’, meeting participants ‘widely agreed that there was no room for complacency and that the Governing Council had to continue to stand ready and use all of its instruments, as appropriate, to ensure a robust convergence of inflation towards its aim.’

According to the meeting account, ‘the view was held’ that were financing conditions to ease because of higher inflation expectations, the ECB ‘should allow real interest rates to decline’. This was justified in the context of below-target projected inflation as a means to ‘provide additional support for a faster return to price stability.’

‘At the same time, it was maintained that not every increase in nominal yields should be interpreted as an unwarranted tightening of financing conditions and trigger a corresponding policy response’, the account said.

The appropriate yardstick for the favourability of financing conditions was not nominal yields, the account indicated, given that these ‘could rise because of a better economic outlook and higher inflation expectations’, but rather ‘the evolution of real rates, which had declined to record low levels in recent weeks.’

In any case, the account reported, ‘favourable financing conditions needed to prevail for some time in order to provide continued support to the flow of credit to all sectors of the economy and to counter possible macro-financial amplification effects.’