European Central Bank policy makers agreed last month not to build undue expectations in the market about their policy intentions as they consider whether to boost stimulus.
Governing Council members said at their Oct. 19-20 meeting that it was premature to make a firm assessment of the outlook for inflation and the implications for monetary policy, according to an account published on Thursday. They decided that they would be in a better position to take the decision in December, when they receive fresh growth and inflation forecasts and committees complete their review of the program.
“A balanced communication was warranted which would provide reassurances about the Governing Council’s commitment to preserve the very substantial amount of monetary support that was necessary to secure a return of inflation rates toward level below, but close to 2 percent without undue delay,” the account showed. At the same time, they should be “mindful not to trigger undue expectations in financial markets about future monetary policy action.”
A similar sentiment was expressed by ECB Executive Board member Yves Mersch earlier in the day when he warned against “excessive expectations” for the next policy meeting on Dec. 8.
The ECB is due to review its 1.7 trillion-euro ($1.8 trillion) asset-purchase program at that gathering, and will also publish new economic forecasts through 2019. With headline inflation running at 0.5 percent, many economists predict quantitative easing will be extended past the current end-date of March.
Mersch, speaking at a conference in Frankfurt, said the central bank’s extraordinary stimulus measures were not intended to be permanent and should be withdrawn as soon as possible.
“The size of the purchase program means that will take some time, but a permanent commitment to our bond-buying, for example, would set the wrong incentives for government financing,” he said. That would be “a development that would ultimately run up against the ban on monetary financing and so be incompatible with our mandate.”
Any extension of its stimulus package poses challenges for the ECB, which were acknowledged by the Governing Council at the October meeting. One issue may be that it has change the parameters of QE to avert running out of bonds to buy.
Another might be the impact on bank profitability, with lenders already complaining about the squeeze ultra-low interest rates are putting on their margins. The chief concern for monetary officials is whether that damages the transmission mechanism for their policies.
“The possible side effects of the low interest-rate environment and the range of non-standard measures in place on the longer-term intermediation capacity of banks and other financial institutions had to be further examined,” according to the meeting account.
Even so, the Governing Council agreed that the risks to the euro-area recovery remained “tilted to the downside.” Chief Economist Peter Praet reiterated his concern that underlying inflation “continued to lack clear signs of a convincing upward trend.” Policy makers said “wage dynamics appeared to have surprised on the downside,” though employment creation had been more positive.