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, 2-3 December 2015:
Overall, taking into account all views expressed, there was broad agreement that, while euro area inflation was expected to pick up, there had been a further deterioration in the outlook for inflation, so that the return to inflation rates below, but close to, 2% would likely take longer than previously expected. The risks surrounding the outlook for HICP inflation were also assessed, on balance, to remain on the downside.
In sum, most members supported the set of policy measures proposed by Mr Praet, while some members did not, on balance, see a sufficient case for further policy action or were only prepared to support some of the elements put forward. Among the latter, a few members expressed a preference, if further accommodation was seen as warranted, for limiting policy action at the current meeting to a cut in the deposit facility rate, possibly going beyond the 10 basis point reduction that had been proposed and possibly also including the prolongation of fixed rate full allotment tender procedures.
A cut in the deposit facility rate of 10 basis points was seen as unlikely to trigger material negative side effects and was also seen as having the advantage of leaving some room for further downward adjustments, should the need arise. However, the further cut into negative territory would need to be accompanied by close monitoring of the transmission to financial markets, banks and the overall economy, also with regard to possible adverse effects on banks’ liquidity management and their demand for central bank reserves.
Going beyond the proposed 10 basis point cut would, in the view of some members, raise issues about increasing side effects over time. In this context, the experience of other central banks in smaller jurisdictions would only partially apply. It would, in particular, raise issues regarding the profitability of banks and other financial institutions, whereby banks could try to recoup possible losses by increasing lending margins, leading to a tightening instead of a further easing in financing conditions – as well as issues regarding the implementation of the APP and the TLTROs.
At the same time, some members expressed a preference for a 20 basis point cut in the deposit facility rate at the current meeting, mainly with a view to strengthening the easing impact of this measure and reflecting the view that, to date, no material negative side effects on bank margins and financial stability had emerged.
With respect to the proposed extension of the APP, there was broad support for shifting the intended end date of the purchases from September 2016 to March 2017. This extension was regarded as an appropriate measure for additional monetary policy stimulus, as measures directly affecting the yield curve provided strong potential for monetary easing, when operating at the lower bound.
The possibility was also raised of expanding the monthly volume of purchases or, alternatively, of frontloading purchases within the envisaged envelope so as to strengthen the impact in the short term. Moreover, the option was raised of extending the horizon beyond the suggested six months, so as to increase the overall volume of purchases above the level suggested by Mr Praet. However, there was broad agreement that such measures would not be warranted at this juncture, while a reassessment could be made in future.