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, 19-20 July 2017:
At the same time, concerns were expressed about a possible overshooting in the repricing by financial markets, notably the foreign exchange markets, in the future. It was underlined that the still favourable financing conditions could not be taken for granted and relied to a considerable extent on a continued high degree of monetary policy accommodation. Such favourable financing conditions were providing significant support to the upturn in the euro area economy and continued to be seen as necessary for inflation to rise towards the Governing Council’s inflation aim.
Taking all these considerations into account, members generally agreed that, from the present perspective, the available evidence continued to indicate that convincing progress on a durable and self-sustaining convergence of inflation to the Governing Council’s medium-term inflation aim had still to be secured. Although inflation was gradually moving towards this aim and confidence in this movement was increasing overall, convincing signs of a more dynamic pick-up in measures of underlying inflation were yet to appear. Moreover, the baseline scenario for inflation remained crucially conditional on the very easy financing conditions that largely depended on the current accommodative monetary policy stance.
Against this background, there was broad agreement among members that there was presently a continuing need for steady-handed and persistent monetary policy. The current monetary policy stance remained appropriate. This included keeping in place all elements of the Governing Council’s forward guidance on its key interest rates and the intended pace of monthly net asset purchases.
The case was made for proceeding gradually and prudently when approaching adjustments in the monetary policy stance and communication in line with the Governing Council’s evolving assessment. Caution was expressed that, in the present financial market environment, markets were particularly sensitive to incoming information. On the one hand, the improving economic environment could be expected to have an impact on forward-looking financial variables. On the other hand, there was a risk that financial conditions could tighten to a degree that was not warranted by the improvement in economic conditions and the outlook for inflation. In this context, the point was made that, looking ahead, the Governing Council needed to gain more policy space and flexibility to adjust policy and the degree of monetary policy accommodation, if and when needed, in either direction.
A suggestion was made that some consideration be given to an incremental adjustment in the language on forward guidance, because postponing an adjustment for too long could give rise to a misalignment between the Governing Council’s communication and its assessment of the state of the economy, which could trigger more pronounced volatility in financial markets when communication eventually had to shift. However, it was generally judged paramount at this stage to avoid sending signals that could be prone to over-interpretation and might prove premature. Accordingly, there was agreement among all members to retain all elements of forward guidance, as proposed by Mr Praet.
The Governing Council would, in the autumn, consider the future course of its monetary policy and, in particular, its strategy for asset purchases beyond the currently communicated horizon.