ECB officials agreed that interest rates should remain at current levels until the end of 2019, with some debate about shifting the forward guidance to March 2020 instead, on the back of weaker than expected economic data, uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets, minutes of the March meeting showed. Policymakers also concurred that the launch a new series of quarterly TLTRO would preserve favourable bank lending conditions and the smooth transmission of monetary policy.
Excerpts from Account of the monetary policy meeting of the Governing Council of the European Central Bank, held in Frankfurt am Main on Wednesday and Thursday, 6-7 March 2019:
A number of members voiced an initial preference for extending the forward guidance through the end of the first quarter of 2020, while expressing their readiness to join a consensus forming on Mr Praet’s proposal, with the overall policy package seen as finely balanced. Shifting the forward guidance to March 2020 instead of December 2019 would provide additional accommodation and would be more in line with the markets’ pricing of a first interest rate increase, compared with survey-based expectations. It was argued that a clear easing signal would be important in view of the significant downward revisions to the ECB staff projections.
Other members preferred to extend the forward guidance until the end of 2019 as this was considered to be more consistent with the baseline scenario underlying the projections that foresaw a rebound of the economy in the second half of 2019. Caution was expressed about committing to a longer horizon well into the following year in a situation of high uncertainty where incoming data could evolve in very different ways. In view of the high prevailing uncertainty, a data-driven gradualist approach was seen as most appropriate, while it was also argued that the Governing Council should avoid giving the impression that policy would be all but predetermined until the end of the year. The need for more analysis of the effects of the various unconventional measures on financial intermediation was mentioned.
All in all, members agreed to extend the Governing Council’s forward guidance through the end of 2019 as part of the overall package, as proposed by Mr Praet. Recalibrating the calendar-based leg of the Governing Council’s forward guidance would signal the Governing Council’s determination to provide the monetary accommodation needed for a sustained convergence of inflation. At the same time, it would not pre-empt the Governing Council’s readjustment of its monetary policy, if needed, at one of its coming meetings should the outlook evolve less favourably than expected. Moreover, the state-based leg of forward guidance automatically implied a shift in rate expectations if the economic conditions for an interest rate increase were not yet in place. Satisfaction was expressed that the state-based element of the Governing Council’s forward guidance was working well, together with the calendar-based guidance.
Members also expressed broad support for Mr Praet’s proposal to launch a new series of quarterly targeted longer-term refinancing operations (TLTRO-III) starting in September 2019 and ending in March 2021, each with a maturity of two years. These new operations would help to ensure that bank lending conditions remained favourable and would support the smooth transmission of monetary policy via the banking sector. In the light of looming cliff effects related to maturing TLTRO-II operations, upcoming regulatory requirements and the risk of some deterioration in funding conditions for banks, TLTRO-III would help to avoid increasing funding pressures for banks.
ECB | Joana Ferreira | joana.ferreira@tradingeconomics.com
4/4/2019 12:44:41 PM