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MNI (London)
By Luke Heighton
     FRANKFURT (MNI) - Continued low inflation could undermine the credibility
of the European Central Bank's monetary policy, it warned last month, amid
concerns the "soft patch" affecting Europe's largest export economies could
spread outward, and a recognition that policymakers must "stand ready" to act in
the face of "adverse contingencies in the period ahead."
     Here are the highlights from the account of the ECB's Governing Council
meeting in Vilnius:
     - In his first presentation to the Governing Council as Chief Economist,
Philip Lane remarked that while the most recent hard data for Q1 were better
than expected, weak global trade and the prolonged presence of uncertainties
continued to act as a drag on growth. As a result, the balance of risks remained
tilted to the downside, he said, despite recent downward revisions to the ECB's
growth projections. Trade tensions had re-escalated, uncertainty about Brexit
and emerging market fragility were also concerns.
     - Lane proposed extending forward guidance on the path of interest rates to
"at least through the first half of 2020"; reaffirming the current stance on
reinvestments, and setting out the terms of the upcoming TLTRO-III subsequently
announced. Looking ahead, Lane said, the Governing Council "needed to be
determined to act in case of adverse contingencies," and should "stand ready to
ease the monetary policy further by adjusting all of its instruments" as
appropriate. These "could include" extending forward guidance further,
restarting net asset purchases and decreasing policy rates.
     - Members "broadly shared" Lane's economic analysis of the outlook for
economic activity in the euro area, while "highlighting" the ongoing weakness in
global trade. "Concern was expressed about more pervasive and prolonged
uncertainties in the external environment and their adverse impact on the global
growth outlook for some time to come." Risks to the external environment were
"generally seen to be increasing or to have already increased, with the
condition of the trade relationship between the US and China the most notable,
in addition to Brexit.
     - "It was underlined that markets appeared to see heightened trade
conflicts as a proxy for a more fundamental shift in the multilateral world
order," the account stated. "Attention was drawn to an apparent dichotomy
between economic projections and prevailing market perceptions of the outlook,"
though "a view was expressed that markets might be prone to overreaction and
overshooting, while economic projections tended to be somewhat sluggish in
revising the outlook and subject to mean reversion. The point was made that
financial markets tended to give greater weight to tail risks than the
baseline," which members "underlined [...] remained broadly consistent with the
March 2019 ECB staff projections and that changes were not very substantial,
especially with regard to inflation." Nevertheless, "there should be no room for
     - "Attention was drawn" to the disparity in growth rates across the euro
area, which pointed to the observed "soft patch" in activity being mainly due to
"two of the larger euro area economies, which had sizable export-oriented
manufacturing sectors." However, "it was also cautioned that the manufacturing
slowdown observed in these two economies might yet spread further, in view of
integrated intra-European value chains."
     - Members "broadly shared" Lane's assessment that "at current levels" the
ECB's negative interest rate policy continued to support economic growth and
inflation. The immediate costs to banks were considered to be "overall limited
in size" and outweighed by their positive benefits to the overall environment
"so far." "The point was made that such findings warranted further analysis and
that this assessment might not hold for lower policy rates or for horizons
longer than those currently envisaged in the Governing Council's forward
     - Members "widely shared" Lane's assessment of the monetary policy stance,
and there was "broad agreement" that an update of the stance was called for "in
light of the prolongation of uncertainties and their implications for the
inflation outlook." It was considered "important for the Governing Council to
demonstrate its determination to act [...] and to further prepare for adverse
contingencies in the period ahead." There was "broad agreement" with the overall
package of policy proposals put forward, but "some nuances were expressed about
individual elements [within it]." 
     - An adjustment to forward guidance was "widely seen as appropriate," and
members "widely supported" Lane's proposals regarding the terms of TLTRO-III.
"Some arguments were made in favour of pricing more in line with TLTRO-II."
     - Members "broadly shared" Lane's analysis regarding the positive
contribution of negative interest rates "at the current point in time", but
there was "broad agreement" that their possible negative side-effects on
bank-based intermediation should be monitored. "It was underlined that the
possible side-effects of a low interest rate environment would also need to be
addressed by adequate macroprudential policies," and "a call was made" to
strengthen the effectiveness of macroprudential frameworks and tools to address
"possible financial stability risks arising from rates remaining at very low
levels over a prolonged horizon."
     - "Should the environment of too low inflation continue to prevail," the
accounts reported, "considerations of a more strategic nature might be warranted
in order to reinforce the credibility of the ECB's monetary policy. The point
was made that the Governing Council's communication should put more emphasis on
the symmetry of its medium-term aim [...] as long as this supported the
achievement of the Governing Council's inflation aim in a sustained manner over
the medium term." 
     - Equally, "care needed to be taken to ensure that any considerations of a
strategic nature could not be seen as moving the goalposts at a time when it
proved challenging to the Governing Council's inflation aim."
--MNI Frankfurt Bureau; +49-69-720-146; email:
--MNI London Bureau; tel: +44 203-586-2225; email:
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