EMU: ECB Minutes

Thu Jan 12 06:30:00 CST 2017

The short-form accounts of last month's ECB meeting show general agreement over the economic outlook. In particular, while inflation was thought likely to accelerate over coming months, Eurozone growth would probably remain too slow to propel it towards its near-2 percent target over the medium term.

Even so, deflation risks were perceived to have eased somewhat since the previous gathering and there had been some promising signs of higher inflation expectations. In particular, the five-year forward inflation-linked swap rate five years ahead had risen to around 1.7 percent. Oil prices had also recovered some ground. Crucially however, members were cautious about prospects for wages. Noting that in-house forecasting errors here had been notably large, there was some concern that the degree of slack in the labour market might be more marked than currently assumed. As a result, both upside and downside risks to inflation were seen to warrant close monitoring.

Having agreed that a substantial amount of monetary accommodation would be required in 2017, two main policy options were considered. These entailed continuing the Asset Purchase Programme (APP) from April 2017 at the current pace of E80 billion/month for an additional six months or extending the programme by nine months until the end of December 2017 at a reduced monthly pace of E60 billion. Some members preferred the former option but were prepared to join the majority favouring the latter.

There was also broad agreement that the Governing Council should retain the necessary flexibility to again upscale APP purchases, if needed. Should the economic outlook deteriorate or financial conditions tighten unduly, the Governing Council could once more increase the size and/or duration of the programme, possibly re-scaling purchases to a pace of E80 billion.

If the Eurozone economy matches expectations, December's meeting will probably have put in place the monetary stance for 2017. To this end, recent economic news has been promising but, as the ECB is clearly willing to acknowledge, there are far too many uncertainties at home and abroad to be truly confident.

The European Central Bank (ECB) meets about every six weeks to determine the appropriate stance of monetary policy. The precise details of the policy deliberations are kept secret for thirty years but, since the 22nd January 2015 meeting, summary version of the minutes have been made available around four weeks after the discussions have taken place.

The minutes provide a key insight into what the ECB is focusing upon when setting policy. As such they potentially can have a sizeable impact upon investor sentiment; especially at times when speculation is rife about a possible near-term change in official interest rates and/or non-conventional monetary policy instruments.