The December minutes turned out more hawkish than expected. While the policymakers generally judged that the existing monetary policy remained ‘appropriate’. They also agreed that the forward guidance might warrant some adjustments as the pace economic recovery accelerated. The minutes noted that the ‘transition would take place without a change in sequencing’, suggesting that no rate hike would be implemented before the end of the asset purchase program. The minutes indicate that the forward guidance would be a key policy tool in the year ahead.

Upbeat Economic Outlook

On the economic developments, Executive Board member Praet described the pace of expansion as ‘robust’. He acknowledged that drivers of growth were becoming ‘increasingly self-supporting’ while the expansion had become ‘increasingly broad-based across countries’. Indeed, the optimism has been revealed in the staff economic projections released last month. Recall that the staff upgraded the GDP growth estimates to +2.3% in 2018 and +1.9% in 2019, up from previous projections of +1.8% and +1.7%, respectively. The staff also projected growth to be +1.7% in 2020.

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On inflation, Praet noted that ‘measures of underlying inflation had weakened overall and had yet to show convincing signs of a sustained upward trend’. He added that ‘steady absorption of economic slack gave grounds for increased confidence that price pressures would gradually take hold’. The Governing Council largely agreed with Praet’s assessment and it was remarked that some of the downside surprises to core inflation appeared to ‘be of a temporary nature, reflecting one-off factors’. The staff in December also revised headline inflation higher, by +0.2 percentage point, to +1.4% in 2018. However, core inflation is revised -0.2 percentage point lower to +1.1% next year. Inflation forecast stayed unchanged for 2019, with both headline and core HICP readings at +1.5%. For 2020, headline and core inflation are projected to be +1.7% and +1.8% respectively

Revisiting Forward Guidance

Against the backdrop of a stronger recovery, the members ‘widely shared’ the view that ‘the Governing Council’s communication would need to evolve gradually, without a change in sequencing, if the economy continued to expand and inflation converged further towards the Governing Council’s aim’. The minutes added that ‘the language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year’.

While there were remarks that ‘a gap appeared to be emerging between favorable economic conditions and a policy stance that remained in a crisis configuration’, it is believed that the favorable recovery situation is still dependent on ‘an ample degree of monetary accommodation’.

ECB’s key policy tool for the year ahead would be the gradual transition in the forward guidance from ‘the present conditionality focused on APP net purchases’ to ‘a broader concept of forward guidance comprising various dimensions of the monetary policy stance’. The tweak would be data-dependent and hence link the future policy rate path to the inflation outlook.


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