ECB accounts: Forward guidance on the key rate is the primary tool

It emerges from the ECB’s monetary-policy account for the December Governing Council meeting that the monetary custodians have debated possible risks to the economic outlook in more detail. There was a consensus among the central bank’s top echelons that uncertainty factors are now looming larger and that there is now therefore a greater risk of a cyclical slowdown. This assessment, the transcript declares, is broadly reflected in the downward revision to the real GDP growth projections for 2019 and 2020. ECB representatives did not, however, believe that an adjustment to the “balance of risks”, tilting this to the downside, was appropriate. Proceeding from the basis of the downwardly revised forecasts, the ECB’s policymaking committee concludes that the risks surrounding the growth outlook can still be assessed as broadly balanced.

Regarding the trend in inflation, the eurozone’s monetary authorities showed confidence that underlying inflation in the European economy is going to gradually pick up. The central bank’s assessment on this score is backed up, amongst other things, by the observation that wage pressure has intensified across the euro area over the past few quarters. At the same time, the monetary custodians do concede that it may take some time until this development results in a higher overall inflation rate. In the light if this, it is argued in the minutes that an ample degree of monetary accommodation is still required. It was also pointed out that the forward guidance on principal payments from maturing securities purchased under the APP is serving this purpose (continue to reinvest… for an extended period past the date when the Governing Council starts raising the key ECB interest rates…“). It was commented that linking forward guidance on the APP to the interest rate “lift-off” (“chained guidance”) signals to market actors that the forward guidance on ECB key rates remains the Governing Council’s primary tool for adjusting the monetary-policy stance going forward.

In the event of the clouds in the economic sky growing darker during the coming weeks and months, the monetary watchdogs will probably start by tweaking their current forward guidance on key interest rates. Up to now, the tenor here has been that the ECB could consider a rate hike in autumn 2019 under the proviso that inflationary pressure in the European economy is picking up. We assume that the ECB‘s bigwigs will not immediately adjust their guidance at the next Council meeting; the touchstone here will probably be the next set of revised ECB staff economic and inflation projections in March.


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