ECB Stimulus Disagreements Signal Vigorous Debates Ahead

  • Central bank publishes account of Dec. 7-8 Governing Council
  • Some policy makers rejected both options for QE extension

European Central Bank policy makers appear to have had a lively debate on how to set the path of stimulus last month, signaling more tension may be ahead as euro-area inflation accelerates.

While the Governing Council largely shared the view that “the scenario of a gradual uptrend in inflation still relied, to a considerable degree, on accommodative monetary-policy support, ” the 25-member body couldn’t reach unanimity on how to maintain that support, an account of their Dec. 7-8 meeting shows. Executive Board member Peter Praet, the chief economist, presented two options of extending bond-buying after March for 6 months at 80 billion euros ($85 billion) a month, or for 9 months at 60 billion euros.

“A few members voiced an initial preference for the first option presented by Mr. Praet, whereby purchases would be continued at a monthly pace of 80 billion euros for an intended horizon of 6 months, while expressing readiness to join a consensus forming the second option,” according to the account. “A few members could not support either of the two options.”

The Governing Council eventually chose to approve the second option, with ECB President Mario Draghi saying at a press conference that there was a need to sustain stimulus in an uncertain regional and global environment. The euro area faces a run of national elections that could see populists gaining more traction, just as the U.K. negotiates its exit from the European Union and Donald Trump starts his U.S. presidency.

Longer Extension

Some policy makers called for an even longer extension for quantitative easing, arguing that it could “reinforce a sustained market presence of the Eurosystem to shield the euro area recovery for longer from possible adverse influences.” The Governing Council agreed that purchases could be stepped up again if needed.

“Arguments were also put forward in support of a shorter purchase horizon, namely limited to 6 months at a re-scaled pace of purchases of 60 billion euros,” the account showed.

The final decision “was seen as striking the right balance between providing a signal of confidence and the need to preserve stability in an uncertain environment, while having clear merits in terms of flexibility to respond to adverse circumstances and safeguarding operational feasibility,” the ECB account showed.

In addition to its decision to extend QE, the Governing Council announced changes to the program’s rules which included scrapping the requirement that eligible bonds must have yields above the deposit rate, currently at minus 0.4 percent, and also allowed purchases of debt with maturities between 1 and 2 years.

Parameter Change

Executive Board member Benoit Coeure expressed a preference for the second option because “the two parameter changes would be sufficient and could offer more room for maneuver,” while the first option would have “required additional changes to the design of the public sector purchase program.”

Since the meeting, data has shown euro-area inflation accelerated faster than expected to 1.1 percent in December, mainly on a surge in the cost of oil. Coeure said last month that there could be “upside risks” to consumer prices, but that the ECB is still waiting for signs of a pickup in core inflation, which hasn’t topped 1 percent in more than a year.

Policy makers noted that while core inflation remains too low, there is scope for higher headline inflation to feed into wage growth.

“The wage bargaining process had been quite subdued so far but this might change once workers realized that real wages were not increasing, or were even decreasing,” the account showed. “Labor-market developments in the euro area might continue to be more dynamic than expected, given recurrent positive surprises.”

The Governing Council holds a monetary-policy meeting next week. While signs that the ECB’s price-stability target is in sight could spur more hawkish members of the Governing Council to call for an exit from QE, Executive Board member Yves Mersch said last week that the ECB “never” reacts to monthly inflation data “unless there is something that would terribly invalidate our projections”.

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