Some ECB Officials Wanted October Easing on Deflation Risk

  • ECB publishes account of Oct. 22 Governing Council meeting
  • Concern seen that weak oil prices feeding into core inflation

Some European Central Bank policy makers called for more stimulus amid deflation risks, a sluggish euro-area recovery and weak oil prices at their Oct. 22 Governing Council meeting in Malta.

“It was argued that, in such an environment, the risk of deflation remained relevant,” members said, according to an account published by the ECB on Thursday. A presentation by Executive Board member Peter Praet, the institution’s chief economist, said that “while weak price pressures were largely the result of lower oil prices, indirect effects on core inflation were significant in the present environment.”

Praet’s team of economists is investigating whether current record-low interest rates, bank loans and a 1.1 trillion-euro ($1.2 trillion) bond-buying package are enough to revive euro-area consumer prices and growth. He said in a speech earlier in the day that a central bank cannot allow short-term movements in oil prices to determine inflation expectations.

China Uncertainty

ECB President Mario Draghi said officials would “re-examine” their policy stance on Dec. 3, when new forecasts for inflation and economic growth will also be released. In recent weeks, governors have sent mixed signals over the need for further easing for a currency bloc that is showing domestic resilience but which is exposed to a global slowdown spurred by China’s cooling economy. The accounts showed officials saw uncertainty surrounding China as still “particularly high.”

The euro pared gains after the account was published. It traded at $1.0695, up 0.3 percent, at 1:45 p.m. Frankfurt time.

Praet’s presentation mentioned “downside risks to the September baseline scenario, notably as regards the inflation outlook,” according to the accounts. The ECB that month projected prices in the euro area will rise 1.1 percent in 2016 and 1.7 percent in 2017. The goal is medium-term inflation of just under 2 percent, a level not seen since early 2013.

“Such a downward revision to the inflation outlook was seen as potentially worrisome, especially when coupled with less robust evidence of a sustained turning point in underlying inflation,” the authors wrote. There is a risk that consumer prices, “after a pick-up around the turn of the year owing to oil price-related base effects, could fall back to relatively low levels in early 2016.”

Tail Risk

On the back of the assessment, “reference was also made to a potential deflationary scenario, which could not be fully excluded as a tail risk,” the account showed. Governing Council members also noted that market-based measures suggest the likelihood of deflation has decreased since the start of the year.

“The view was put forward that a case could be made for considering reinforcing the ECB’s accommodative monetary-policy stance already at the current meeting and, in any case, to act sooner rather than later,” the accounts show.

A separate view was that “one could not unambiguously conclude that the monetary-policy stance had tightened.” Members warned against “reaching premature conclusions with respect to policy implications.”

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