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, 8-9 March 2017:
As regards communication, members generally agreed with the proposals made by Mr Praet in his introduction to keep the communication with respect to the Governing Council’s monetary policy stance and its forward guidance unchanged, while acknowledging that the economic expansion in the euro area had become more robust as the recovery was firming and broadening further, and that the risks to the economic outlook had become less pronounced, though they still remained tilted to the downside. At the same time, remaining uncertainties and fragilities, notably related to the external environment but also to political developments in the euro area, continued to call for caution.
In this context, views were also exchanged on whether conditions had already improved to an extent that would allow for an attenuation of the “easing bias” embodied in the Governing Council’s forward guidance.
Against this background, the view was put forward that removing the downward bias regarding interest rates would be in line with a gradual and cautious adjustment of the Governing Council’s forward guidance, in step with changes in the Governing Council’s assessment. Keeping the Governing Council’s forward guidance well aligned with its evolving assessment was seen to underpin the consistency and credibility of the Governing Council’s communication, as both deflationary risks and associated market expectations of further rate cuts had largely vanished.
At the same time, it was recalled that the easing bias was an integral part of the Governing Council’s forward guidance and of the monetary policy stance, which contained an important forward-looking signalling component. Changes in the formulation at the current juncture could lead to an undue upward shift in market interest rates and tighten financial conditions to an extent that was not warranted by the prevailing outlook for price stability.
On balance, removing the downward bias on interest rates in the present formulation of the Governing Council’s forward guidance at the current meeting was seen as premature, as there was still considerable uncertainty surrounding the economic outlook and the robustness of inflation convergence.
At the same time, economic conditions and the balance of risks had clearly improved, and, notably, deflationary risks had largely disappeared. As had been suggested by Mr Praet in his introduction, nuances in the communication could convey a more positive tone on the state of the euro area economy, while signalling less urgency for further monetary policy action. In particular, it was felt that there was no longer a need to emphasise the Governing Council’s readiness to act by using all the instruments available within its mandate, reflecting that negative scenarios, which could trigger further monetary policy action, were assessed to have become less likely, even if they could not be fully excluded.
Looking ahead, it was recalled that, if the euro area economy were to recover further and as inflation proceeded further on its path towards the Governing Council’s inflation aim in a sustained manner, a discussion on policy normalisation would become warranted in the future.