Excerpts from the Account of the monetary policy meeting of the Governing Council of the European Central Bank, held in Tallinn on Wednesday and Thursday, 7-8 June 2017:
With regard to the monetary policy stance, members widely shared the assessment provided by Mr Praet in his introduction that the euro area economy was expanding at a somewhat faster pace than previously expected and that risks to the growth outlook were now broadly balanced. However, the economic expansion had still to translate into stronger inflation dynamics and, in particular, underlying inflation pressures had yet to show a convincing upward trend. Accordingly, members widely agreed that, while the growth outlook had become more favourable, the overall picture of the outlook for price stability had not fundamentally changed. The volatility observed in inflation data over the past few months, together with the latest downward revision to the inflation outlook, indicated that inflation would remain some way below the Governing Council’s inflation aim for some time to come. At the same time, risks to the growth outlook had become balanced and deflation risks had largely dissipated, with confidence in the inflation outlook gradually increasing. Against this background, it was felt that the Governing Council’s communication, including its forward guidance, needed to reflect the changed risk assessment regarding the medium-term outlook for price stability, namely a configuration of increased confidence in the baseline scenario combined with further diminished tail risks.
It was argued that the improved economic environment with vanishing tail risks, in principle, suggested also revisiting the easing bias with respect to the APP purchases, whereby the Governing Council signalled its readiness to increase the pace and/or duration of the asset purchases if necessary. However, it was cautioned that prudence remained warranted, as the economic expansion had yet to translate into stronger inflation dynamics, and a sustained adjustment in the path of inflation towards the Governing Council’s inflation aim could not yet be confirmed. The assessment of the prospects for a sustained adjustment argued for patience, as the inflation outlook remained vulnerable to a premature tightening of the monetary policy stance. Therefore, in the light of the prevailing uncertainties, predominantly related to global factors, the Governing Council was well advised to adapt its forward guidance to the changing economic environment only very gradually.
At the same time, it was cautioned that even small and incremental changes in the communication could be misperceived as signalling a more fundamental change in policy direction. This could trigger unwarranted movements in financial conditions, which could put the prospects of a sustained adjustment of inflation at risk. Moreover, it was highlighted that dropping the policy rate bias should not be misunderstood as ruling out the use of the interest rate instrument irrespective of the circumstances. Its removal only signalled that, given the current outlook and risk assessment, from the present perspective a further rate reduction had become unlikely.