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Members of the European Central Bank's Governing Council face tough talks to turn their new, carefully ambiguous, inflation target into forward guidance in a simplified introductory statement for Thursday's meeting, Eurosystem sources told MNI, adding that the ECB will push back key decisions regarding the future of asset purchases for many months and possibly until next spring.
ECB President Christine Lagarde has already anticipated publicly that altering the guidance is unlikely to be the result of a unanimous decision, with at least some officials arguing for the bare minimum of changes to incorporate the new target.
The streamlined statement may adopt the words "forcefully" and "persistent" to describe its response to sub-target inflation, as specified in the recently-concluded strategy review, a source familiar with internal discussions said. There could also be echoes of the call by Executive Board Member Isabel Schnabel for visible moves in underlying inflation to be taken as a key indicator of the outlook, the source added.
The horizon for reinvestment of principal payments from asset purchases could be extended, the official said, though other proposed changes would meet with resistance.
NO OVERSHOOTING EXPERIENCE
Another source told MNI few alterations were required. "We need to change the forward guidance only to take account of the fact it's now not 'close to but below 2%,' but '2%'," said the official, who expected inflation to be closer to 2% by 2023 than the 1.4% projected by the ECB. But he conceded that Lagarde has proven herself capable of pushing through decisions when Governing Council members cannot agree.
Another Eurosystem source said the ambiguity embedded in the new objective, which targets 2% inflation over an unspecified medium term and allows for prices "moderately" above target for a "transitory" period, meant that Governing Council meetings "will not be boring" for some time.
"It will not be easy. These things have been left unspecified because these are margins of flexibility that you want to maintain," the official said, noting that the Federal Reserve's average-inflation targeting strategy was also vague. "We are aware that this will create some divergence of expectations. No central bank in the world has had enough experience with these overshooting announcements."
Changes to the introductory statement must be expressed in simpler language from which technical terms and lengthy explanations could be removed. The number of data points referenced could be considerably reduced, and references to money supply growth rates omitted altogether, a source said.
Opinions are divided as to whether this will facilitate the expression of nuanced monetary policy stances, with one Eurosystem official telling MNI he thought there was a danger of a "Dr Seuss"-style simplification, in a reference to the well-known children's author.
While some officials had argued for the ECB to adopt a Fed-style inflation make-up strategy, the new "symmetrical" target simply calls for policy to respond forcefully to boost inflation to target when there is a danger that rates could fall towards the lower bound.
"We don't want to anchor expectations much above 2%, we want it to re-anchor them at 2%. This is the misunderstanding that we have to clarify in the coming weeks and months," said one official.
Another source said he had been disappointed by the strategy review, which would lead to a return of the "same old disputes."
"Is this really a dovish decision? I don't think so," the official said, adding that "medium term" might end up interpreted as being as little as a year. Bank of Latvia Governor Martins Kazaks told MNI earlier this month that "medium-term" depended on the performance of the economy.
"If it's state-dependent then I guess the hawks are okay with one year, and after that we have to get back to 2%," the official said, referring to the absence of references in the strategy review to possibly differing conditions among eurozone countries.
"I don't believe that the Council will leave [southern member states] on their own, but at the same time I think it's wrong to believe that it's dovish or will make the difference. It's balanced. It's ambiguous. We're going to see."
Officials who spoke to MNI acknowledged the Delta variant of Covid-19 presented a downside risk.
One pointed to other troubling signs. "There are some numbers that came out from the U.S. that are not as reassuring as somebody thought they were," the official said. "We are seeing that in the countries that are more advanced in the recovery there are signs of weakness."
Many officials said it was almost certain that the entire EUR1.85 trillion envelope available to the Pandemic Emergency Purchase Programme would be used by the time its net purchases end in March. Some have suggested that the PEPP's flexibility could be transferred to the ECB's older Asset Purchase Programme, but this discussion seems unlikely to take place for some time.
"There are no discussions like that, because it would be crazy to start discussing something nine months in advance with the level of uncertainty that we have," an official said. "It would be crazy because if we had any leak it would be very unfortunate."Another official agreed. "How the APP will be adapted after the end of PEPP? That's a decision for March. We won't be taking that decision even in February, we will take it in March," another official said.
An ECB spokesperson declined to comment on the matters in this article.
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