Excerpts from Account of the monetary policy meeting of the Governing Council of the European Central Bank, held in Vilnius on Wednesday and Thursday, 5-6 June 2019:
Responding to the further weakening of the economic outlook and the muted inflation developments, in the context of prolonged uncertainties, the extension of the calendar element of the forward guidance on interest rates was widely seen as appropriate. The point was made that, if the calendar-based component was progressively aligned with market expectations in response to changes in the macroeconomic environment, the independent value of the calendar element could be seen to be diminished. The forward guidance on the interest rate path nonetheless remained the principal instrument for adjusting the monetary policy stance and had proved effective. Moreover, the extension of the calendar-based component by six months was seen to be in line with a gradual approach to adjusting policy, which would allow monitoring in the period ahead to see whether the observed prolonged “soft patch” proved to be persistent. In addition, it was underlined that the state-contingent element embodied a powerful automatic stabiliser, as indicated by the very substantial downward shift in the entire interest rate swap curve since the beginning of the year.
With regard to the pricing of the TLTRO III operations, members widely supported the proposal made by Mr Lane and agreed with his assessment that this struck a reasonable balance between acknowledging the solid developments in bank lending and the importance of preserving the ECB’s accommodative monetary policy stance. The pricing of a minimum rate at the deposit facility rate plus 10 basis points was widely seen as very favourable and maximising the policy effectiveness of the forthcoming operations. Some arguments were made in favour of a pricing more in line with that of TLTRO II. This was seen as making the contribution of TLTRO III to the monetary policy stance even stronger. At the same time, it was acknowledged that bank lending was, overall, much stronger now than had been the case when TLTRO II was announced.
At the same time, there was broad agreement that, in the light of the heightened uncertainty, which was likely to extend further into the future, the Governing Council needed to be ready and prepared to ease the monetary policy stance further by adjusting all of its instruments, as appropriate, to achieve its price stability objective. Potential measures to be considered included the possibility of further extending and strengthening the Governing Council’s forward guidance, resuming net asset purchases and decreasing policy rates.
In this context, it was also noted that, should the environment of too low inflation continue to prevail, considerations of a more strategic nature might be warranted in order to reinforce the credibility of the ECB’s monetary policy and support the achievement of a sustained adjustment in inflation to its inflation aim. The point was made that the Governing Council’s communication should put more emphasis on the symmetry of its medium-term aim by clarifying that deviations of inflation from the Governing Council’s inflation aim would be tolerated in a symmetrical fashion, in both directions, as long as this supported the achievement of the Governing Council’s inflation aim in a sustained manner over the medium term. At the same time, the point was made that care needed to be taken to ensure that any considerations of a strategic nature could not be seen as moving the goalposts at a time when it proved challenging to achieve the Governing Council’s inflation aim.