ECB accounts: adjustment of forward guidance premature

The latest account of the monetary policy meeting just published today by the ECB reveals that a number of central bankers already spoke out in favour of adjusting the forward guidance for the bond purchasing programme (PSPP) at the January meeting. Supporters of such a move cited among other things growing confidence that inflation would be converging towards the ECB’s medium-term inflation aim. Council members therefore discussed the possibility of dropping any further commitment to a fresh increase in monthly bond purchases. In the end, however, the ECB’s Governing Council agreed that it would be premature (perhaps with an eye on elections in Italy) to rule out this option, although members did not see the increase in yields as having any restrictive impact. The ECB’s representatives are nevertheless in agreement that the forward guidance should be adjusted in the next few months in line with prospects for the path of inflation. Council members indicated that they would also keep a close watch on the euro exchange rate; its volatility was an uncertainty factor for the medium-term inflation outlook, according to them.

In light of ongoing economic recovery in the Eurozone, the voice of the hawks on the Council who are calling for a move away from the ultra expansive monetary policy pursued up to now is increasingly gaining weight. However, as a counter argument, the doves on the Council are still citing the fact that underlying price pressure in the economy remains weak. The central bank’s challenge now is to adjust its monetary policy communication carefully in the next few months in order to prepare market participants for a gradual move away from the current monetary policy course. In this respect, we could envisage that the ECB will take advantage of an upward revision of inflation projections at the March meeting to adjust the PSPP forward guidance.

The ECB is likely to put a greater emphasis of the importance of reinvesting the proceeds of maturing securities in order to counter any potential turbulence in the financial markets. Moreover, Mario Draghi could give a more concrete forward guidance for the ECB’s key interest rate. All the ECB has said so far is that the first rate hike would not come until long after the end of net purchases.

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