The ECB accounts as the Frankfurt-based central bank calls its minutes showed increasingly positive growth outlook that enabled the policymakers to trim its asset purchasing program from the beginning of 2018 to €30 billion a month.
Following is my summary of key messages from the ECB minutes, otherwise pretty long and complicated document.
- With the ECB’s positive growth outlook and tentative signs of inflation creeping towards 2% target, the ECB saw that this was the case for the asset purchasing program reduction. “While there was a continued need for monetary policy to remain accommodative, robust growth momentum, very favorable financial market and borrowing conditions, dissipated deflation risks and nascent signs of rising price pressures made a strong case for scaling back the intensity of the monthly purchases,” ECB minutes say.
- While economic growth and the outlook for growth remain positive, to the ECB’s worry the inflation and wages remain subdued. “Members again drew attention to the discrepancy between the ongoing expansion in economic activity and the relatively subdued inflation and wage dynamics, which was also observed in other major economies.”
- While the ECB remains confident about the growth outlook and general economic conditions improving, with regards to main policy target, the inflation, it is not so sure and the ECB rather leaves the back door open. Therefore the ECB is leaving the asset purchasing in place, although in a reduced amount. “While the strong, broad-based economic momentum had clearly increased the Governing Council’s confidence in a sustained adjustment in the path of inflation, the Governing Council had to remain patient and persistent in order to continue to provide the necessary accommodation in the face of remaining uncertainties.”
- The ECB Governing Council has members proposing earlier exit from current stimulative policies. There were outnumbered by policy Doves in December, but there are there. “Arguments were also put forward in favor of alternative purchase horizons. On the one hand, it was noted that the very robust economic recovery could be used to argue in favor of a shorter purchase horizon and, hence, a potentially swifter phasing-out of asset purchases in the future.”
- Majority of the ECB Governing Council members favors open-ended asset purchasing program in order to retain the operative flexibility. Said simply, in a world full of surprises and uncertainty, the ECB does not feel comfortable to be tight with definite promises. “...the APP to be adapted in a data-contingent manner and, therefore, maintaining the flexibility to react to future shocks was seen to be an integral part of the Governing Council’s established “reaction function” and consistent with previous adjustments to the programme.”
- ECB forward guidance on interest rates remains unchanged with ECB indicating that while the cycle on interest rates reached the bottom as its length "well past the horizon of asset purchases" is still providing enough stimulus. “...the forward guidance on policy rates formed an integral part of the overall monetary policy stance, which included the embedded sequencing of policy instruments.”
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