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 January 2016:
While incoming information had confirmed the ongoing moderate recovery and had provided solid evidence that the monetary policy measures were working as intended, downside risks had increased again amid heightened uncertainty about the growth prospects of emerging market economies, volatility in the financial and commodity markets and geopolitical risks. Moreover, inflation dynamics had continued to be weaker than expected, which, in conjunction with declining inflation expectations, had increased the risk of second-round effects. It was, therefore, recommended to review and possibly reconsider the monetary policy stance at the next monetary policy meeting in early March, when the new ECB staff macroeconomic projections would be available. In addition, it needed to be reaffirmed that policy rates would remain at current or lower levels for an extended period of time. In the meantime, work needed to be carried out to ensure that all the technical conditions were in place to make the full range of policy options available for implementation, if needed.
Against this background, it was considered necessary to review and possibly reconsider the monetary policy stance at the Governing Council’s next monetary policy meeting in early March, as had been suggested by Mr Praet in his introduction. In this context, the commitment needed to be reinforced that the Governing Council was willing and able to take further monetary policy action, if warranted, reaffirming that the Governing Council had a broad range of instruments and tools at its disposal. In this regard, further technical analysis was called for to deepen the Governing Council’s understanding of the effectiveness of the available instruments and to take into account possible side effects. It was concluded that work needed to be carried out to ensure that all the technical conditions were in place to make the full range of policy options available for implementation, if needed.
There was wide agreement among members that emphasis needed to be placed on appropriate communication. This pertained to conveying the Governing Council’s assessment in a way that avoided complacency on the deteriorating price outlook while also avoiding conveying an unduly gloomy message that, in turn, could contribute to self-fulfilling dynamics. The Governing Council needed to strike a balance between signalling clearly its full capacity, willingness and determination to act and, at the same time, not implying that policy action had already been decided when the economic environment remained very fluid.
The Governing Council needed to reiterate that monetary policy was firmly committed to achieving inflation rates below, but close to, 2% over the medium term. It should emphasise the effectiveness of the instruments that had been activated since mid-2014, and recall that a substantial degree of accommodation was still in the pipeline, which would take time to fully unfold and pass through to the euro area economy. Moreover, it needed to be reaffirmed that, if the Governing Council had to intensify the use of the available range of policy options in order to achieve its price stability mandate, it would not hesitate to do so.
At the same time, it had to be avoided, by means of appropriate communication, that markets developed undue or excessive expectations about future policy action, bearing in mind the market volatility experienced around the December 2015 monetary policy meeting.