ECB Officials Divided on September's Stimulus Package

Several ECB policymakers opposed the new bond purchases and a multi-tier deposit rate, even as all members reiterated the need for a highly accommodative stance of monetary policy for a prolonged period of time, minutes of the September meeting showed.

Excerpts from Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt am Main on Wednesday and Thursday, 11-12 September 2019:

A number of members assessed the case for renewed net asset purchases as not sufficiently strong, either because they deemed them to be a less efficient instrument, given the prevailing compression of term premia, or because they deemed them to be an instrument of last resort which should only be deployed in the event of more severe contingencies and which was not warranted in the light of the current outlook, where a package not including net purchases could be considered adequate. Current financial conditions were seen as already being very favourable, in particular with bonds of very long maturities trading at negative yields.

A very large majority of members agreed with Mr Lane’s proposal to lower the rate on the deposit facility by 10 basis points to -0.50%, which – together with the reinforced forward guidance – would act on the whole yield curve, especially in the short to medium-term segments, complementing the effects of net asset purchases on the long end of the curve. In this way, the measure would address the high level of short-term uncertainties that currently prevailed and help preserve very favourable financial conditions. While a few members expressed a readiness to consider lowering the rate on the deposit facility by 20 basis points at the current meeting, in particular as part of a package that would exclude net asset purchases, other members felt unable to support a cut of 10 basis points, as they were concerned about the possibility of increasingly adverse side effects from additional rate cuts.

A majority of members went along with the proposed introduction of a two-tier system for reserve remuneration as part of the overall policy package. With an exempt tier of six times the level of the minimum reserve requirements of institutions subject to such requirements, a two-tier system would help to preserve the positive effects of the negative rate policy on the economy by mitigating the direct cost for banks of holding excess reserves, thereby contributing to the safeguarding of the bank-based transmission mechanism of the Governing Council’s monetary policy. The two-tier system would support the ability of banks to extend loans to their customers on favourable terms and help to preserve the incentives for banks to pass through the stimulus provided by negative rates on their reserves. Furthermore, it would corroborate the Governing Council’s forward guidance that interest rates could be lower than the current levels.

A number of reservations were expressed about the monetary policy justification for a two-tier system. It was argued that, at the current juncture, monetary policy transmission channels seemed to be functioning well. In addition, banks would benefit from TLTRO III, which offered them very favourable lending conditions, and from a significant decline in bank bond yields. A remark was made that providing partial relief only to banks for the costs of negative rates raised potential distributional and communication challenges. Moreover, if a two-tier system were not calibrated properly, it could give rise to side effects and put upward pressure on market rates. It was argued, however, that other jurisdictions with negative interest rates had long since introduced exemption schemes.

ECB Officials Divided on September

ECB | Joana Ferreira |
10/10/2019 12:27:01 PM