The European Central Bank’s governing council floated the idea of changing its key inflation target at its last meeting in a sign of growing frustration at the Frankfurt-based institution’s failure to hit its target for eurozone price increases.
At least one member of the governing council put forward the idea of changing the ECB’s inflation target as part of a potential broader strategic review, according to the minutes of its July monetary policy meeting which were published on Thursday.
The ECB is widely expected to cut interest rates further into negative territory and launch a fresh wave of asset purchases next month as it tries to counter fears that it will consistently undershoot its inflation target of just under 2 per cent.
However in July there was some disagreement on the governing council about which measures to include in the package of monetary easing policies that are expected to be Mario Draghi’s parting shot before he hands over to Christine Lagarde as ECB president at the end of October.
The ECB said there was “broad agreement” about the proposals announced by Mr Draghi to reintroduce an easing bias on interest rates and to prepare the ground for a potential restarting of asset purchases, a strengthening of forward guidance and introducing measures to mitigate the impact of negative rates.
Yet it added: “Some nuances were expressed about the design and the individual elements of a possible policy package.”
Some governing council members argued that a combination of rate cuts and asset purchases was “more effective than a sequence of single actions”.
Economists said the discussion at the July meeting underlined how worried the ECB was about persistently low inflation expectations and signs of a deepening economic slowdown — increasing the odds that it will launch several monetary easing measures in September.
“The ECB finds itself in a rather uncomfortable position,” said Carsten Brzeski, an economist at ING. “It is to demonstrate its willingness and determination to act, while at the same time it also knows that monetary policy alone can no longer solve the low-growth, low-inflation problem of the eurozone. However, doing nothing isn’t really an option.”
Mr Draghi paved the way for a fresh package of measures in July by using his strongest rhetoric yet — including saying the ECB did not have to stop at 2 per cent inflation and could tolerate even higher price pressures for a period.
According to the account of the monetary policy meeting which was published on Thursday, some members of the governing council believe the ECB should examine the possibility of going further and explicitly changing its inflation target.
Critics say the current target could be interpreted as asymmetrical, inferring that the ECB does not want to exceed 2 per cent. One of the members of the governing council, which includes the ECB’s executive board and the heads of national central banks, made this point at the July monetary policy meeting, according to the minutes.
“A view was put forward that a discussion of symmetry around the inflation aim could not be separated from a discussion about the level of this aim, while the point was made that any future change in the inflation aim should not be employed as an isolated policy measure but should be linked to a broader review of the ECB’s monetary policy strategy to ensure consistency of the strategy,” the ECB said in its account of the meeting.
“At the same time, the point was made that a clarification of the symmetrical nature of the governing council’s reaction function would not pre-empt a full review of the monetary policy strategy at a later point in time.”
The US Federal Reserve is already undertaking a full review of its monetary policy strategy, toolkit and communication, with the results due to be announced early next year.
One measure being considered by the ECB to mitigate the harmful effects of negative interest rates is a tiering system that would reduce the amount of commercial bank deposits on which the central bank collects negative interest rates.
But the ECB said that “some concerns were raised regarding possible unintended consequences of a tiered system and its ability to fully mitigate the potential effects of negative policy rates on bank intermediation”.
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