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, 20-21 July 2016:
New headwinds had emerged from the outcome of the UK referendum and uncertainty had risen, relating also to other geopolitical developments and the financial market situation. Yet, it was considered too early to assess with any certainty the possible implications of these headwinds for the euro area economy and, ultimately, for the inflation outlook. Therefore, it was widely felt among members that it was premature to discuss any possible monetary policy reaction at this stage. More time was needed to assess the incoming information over the coming months, although downside risks had clearly increased.
Against this background, it was widely agreed that the immediate policy focus should remain on implementing the comprehensive set of policy measures decided in early March and on preserving an appropriate degree of monetary accommodation in order to secure a return of inflation rates towards levels below, but close to, 2% without undue delay. There was solid evidence that the policy measures that had been adopted were effective and were working their way through to the broader economy over time. Their impact was visible in improved financial conditions, lower bank lending rates and strengthened credit creation, which all helped to raise both growth and inflation in the euro area, although inflation continued to be significantly below the Governing Council’s policy aim.
At the same time, the uncertain environment called for the continued very close monitoring of economic and financial market developments. In this context, it was seen as important to closely monitor the transmission process of the policy measures, which had worked well so far, to ensure that the pass-through of the accommodative monetary policy stance to the real economy was not jeopardised, taking into account risks to bank-based transmission and implications for the cost of borrowing and the availability of credit.
Overall, the view was widely shared that the Governing Council needed to reiterate its capacity and readiness to act, if warranted, to achieve its objective, using all the instruments available within its mandate, while not fostering undue expectations about the future course of monetary policy. In the current environment of heightened uncertainty, a still high level of economic slack and weak wage and price pressures, future discussions were called for regarding wage trends, inflation expectations, the medium-term orientation of monetary policy and the time horizon over which a very accommodative monetary policy stance would remain warranted.