Excerpts from the Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt am Main on Wednesday and Thursday, 7-8 December 2016:
In their assessment of the overall monetary policy stance, members broadly agreed that the inflation outlook and the risks surrounding it warranted keeping a very substantial degree of monetary accommodation in place and extending the APP beyond March 2017. While the recovery was firming and some progress was visible in the inflation trajectory, the scenario of a gradual uptrend in inflation still relied, to a considerable degree, on accommodative monetary policy support. Taken together with the protracted weakness in underlying inflation, a sustained convergence of inflation towards levels below, but close to, 2% over the medium term would not be achieved with sufficient confidence. Therefore, preserving a very substantial degree of monetary accommodation beyond March 2017 was seen as necessary to secure the sustained return of inflation towards levels consistent with the Governing Council’s inflation aim.
Against this background, members exchanged views on the options presented by Mr Praet in his introduction: either to continue APP purchases from April 2017 at the current pace of €80 billion for an additional six months or to extend the programme by nine months until the end of December 2017 at a monthly pace of €60 billion.
A few members voiced an initial preference for the first option presented by Mr Praet, whereby purchases would be continued at a monthly pace of €80 billion for an intended horizon of six months, while expressing readiness to join a consensus forming on the second option. It was highlighted that the first option had the merit of continuity with established policy and was more in line with market expectations. In addition, its higher monthly pace compared with the second option provided potential for more powerful monetary stimulus in the short term. At the same time, maintaining the monthly pace of €80 billion in an environment of declining market liquidity could put increasing pressure on market yields.
Very broad support emerged among members for the second option presented by Mr Praet, namely to continue purchases beyond March 2017 at a monthly pace of €60 billion for an intended horizon of nine months. Overall, this option was seen as striking the right balance between providing a signal of confidence and the need to preserve stability in an uncertain environment, while having clear merits in terms of flexibility to respond to adverse circumstances and safeguarding operational feasibility. The reduction in the monthly pace, together with the envisaged adjustments of APP parameters, was seen as easing the pressure on market liquidity and ensuring a more robust implementation, while leaving sufficient room for manoeuvre to upscale the programme if needed and allowing for a prolonged presence of the Eurosystem in the market.
A few members could not support either of the two options that had been proposed, while welcoming the scaling-down of purchases and other elements of the proposals, in view of their well-known general scepticism regarding the APP and public debt purchases in particular. According to this view, the latter should remain a contingency instrument to be employed only as a last resort in an adverse scenario, such as a situation of imminent deflation, which was not applicable at present, as deflation risks had largely dissipated. Moreover, possible adverse side effects from further sovereign asset purchases, particularly in the medium to long term and related to the interaction with the fiscal domain, needed to be taken into account.