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, 25-26 October 2017:
The proposed package of measures was generally seen to be appropriate for delivering the necessary stimulus for underlying inflation pressures to build up and support headline inflation over the medium term, in particular to avoid validating inflation expectations below levels consistent with the inflation aim. At the same time, a careful and gradual recalibration was warranted in a more benign economic environment, in line with the Governing Council’s established “reaction function”, as shown on earlier occasions when the pace of the APP had been adjusted, up or down, depending on developments in the data.
Against this background, some initial preferences were expressed for a smaller overall envelope of intended APP purchases, as well as for a different monthly pace of purchases for a given intended envelope. On the one hand, it was argued that a higher monthly purchase volume from January 2018 implied a more gradual reduction in the pace of purchases, thereby limiting the risk of “cliff effects”, which could arise from too abrupt a reduction in the purchase volume. On the other hand, some initial preferences were also expressed for a slower monthly pace of purchases from the start of 2018, or a declining path of purchases as of January 2018, as better suited to conducting the asset purchases over an extended horizon, or to exercising the optionality embedded in the Governing Council's forward guidance, within the agreed parameters governing APP purchases.
With regard to the dimension of optionality, different positions were put forward as to whether an open-ended state-contingent formulation remained appropriate or whether the announcement of an end date was preferable. A large majority of members supported keeping the current formulation of the Governing Council’s forward guidance on the APP in place, whereby the purchases were intended to be conducted until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council saw a sustained adjustment in the path of inflation consistent with its inflation aim. Allowing the path of 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. Given the current assessment of the inflation outlook, when more convincing evidence of price pressures had yet to be observed in the data and uncertainties still prevailed, it was seen as more prudent to keep the flexibility to extend the programme further, if necessary.
Therefore, retaining the open-endedness of the APP underscored the Governing Council’s steadfast commitment to preserve the degree of accommodation needed for inflation to return towards levels that were below, but close to, 2%. It was cautioned that any doubt about the Governing Council’s price stability commitment could entrench inflation expectations at low levels. Together with a lower equilibrium real interest rate, this could hamper the Governing Council’s capacity to respond to future shocks. In addition, the announcement of an end date could induce market participants to frontload possible price adjustments, which might lead to an undue tightening in financial conditions.