MNI POLICY: March Measures Down to Poor Data - ECB Account

By Luke Heighton

     FRANKFURT (MNI) - The ECB's March package of monetary policy measures was

necessary in light of the "sizeable moderation" in the pace of euro area growth,

according to the official account of the Governing Council meeting.

     Here are the key points from the minutes:

     -- "A number of members expressed an initial preference for extending

forward guidance through the end of the first quarter of 2020," to provide a

"clear easing signal" and be more in line with market expectations of a first

rate increase. Extending the guidance to the end of 2019 was seen to be more

consistent with the baseline scenario of a rebound in the second half of the

year.

     -- "Caution was expressed about committing to a longer horizon [...] in a

situation of high uncertainty where incoming data could evolve in different

ways," and a "data-drive gradualist approach was seen as most appropriate, while

it was also argued that the Governing Council should avoid giving the impression

that policy would be all but predetermined until the end of the year." "A

question was raised about how frequently forward guidance should be adjusted in

response to new data."

     -- A "sufficiently long" horizon for fresh TLTROs was seen as helping to

bring inflation close to target. A shorter horizon "would provide a stronger

signal to banks that they need to be prepared to secure funding on private

markets and avoid becoming overly reliant on central bank funding." Financial

stability considerations had to be taken into account, not least at country

level.

     -- It was "generally agreed" TLTRO pricing should be indexed to the main

refi rate, and there was "broad agreement that elaborating the details would

need more reflection by the Governing Council and they should be communicated in

due course."

     -- "It was underlined that that the decisions taken should be seen as an

appropriate adjustment of the instruments at the Governing Council's disposal in

reacting to a weakening of economic data and the inflation outlook and should

not be interpreted as a reversal of the policy stance."

     -- "It was also emphasised that while the growth momentum was weaker, it

remained positive," while the probability of a euro area or a global recession

remained "relatively low." A rebound of euro area activity in the second half of

the year was expected, thanks to the fading of temporary factors, improving

external trade and the easing of trade conflicts, and "a case could be made that

the risks to growth were somewhat more balanced" than previously.

     -- "The downside risks to growth in earlier discussions had "to some extent

materialised," the Council agreed. "The weakness in growth was seen as being

longer-lasting than had previously been expected, with the result that growth

was now likely to be below potential for a number of quarters."

     -- "Members acknowledged that [...] uncertainty remained elevated, and it

was unclear how persistent the current soft patch would turn out to be," though

there were some positive indicators relating to the impact of fiscal measures,

favourable financing conditions, the unwinding of certain temporary factors such

as those affecting the German car industry, and further gains in employment and

euro area wage growth.

     -- Members "generally agreed" that the cuts to ECB staff growth projections

implied a slower adjustment of inflation to the ECB's medium-term objective.

Nevertheless, "confidence in the upward movement of inflation dynamics was

expressed, even though the path for inflation was flatter than previously

expected."

     -- The transmission of higher wages to consumer price inflation remained "a

key issue" for the medium-term inflation outlook, with firms having absorbed

increases by lowering profit margins. "Some confidence was expressed," however,

that this would happen "eventually," with lags in transmission to be expected -

though it was noted that the slowdown in economic activity could also weigh on

the transmission mechanism, while the link between wages and price inflation

"might have changed structurally in recent years."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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