ECB head Office - Photo by European Central Bank

JAKARTA (TheInsiderStories) – The European Central Bank’s governing council floated the idea of changing its key inflation target as a combination of measures needed to prop up the eurozone economy that shows paint an even bleaker picture of the outlook, according to the minutes of its July monetary policy meeting which were published on Thursday (08/22).

Several governing councils put forward the idea of changing the ECB’s inflation target as part of a potential broader strategic review. The Germany-based institution 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 percent.

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 Draghi to reintroduce an easing bias on interest rates and to prepare the ground for a potential restarting of asset purchases, a strengthening of forwarding 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”.

Most 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.

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 percent inflation and could tolerate even higher price pressures for a period.

According to the account of the monetary policy meeting, 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 percent. 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 United States 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 number 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”.

Eurostat reported euro-area inflation slowed to 1 percent in July from last year and down from June at 1.3 percent. While, ECB reported the current account of the euro area recorded a surplus of 18 billion Euros, compared with a surplus of 30 billion Euros in May 2019.

The lowest annual rates were registered in Portugal (-0.7 percent), Cyprus (0.1 percent) and Italy (0.3 percent). The highest annual rates were recorded in Romania (4.1 percent), Hungary (3.3 percent), Latvia and Slovakia (both 3.0 percent).

Compared with June, annual inflation fell in fifteen member states, remained stable in two and rose in eleven. In July, the highest contribution to the annual euro area inflation rate came from services (+0.53 percentage points, pp), followed by food, alcohol & tobacco (+0.37 pp), non-energy industrial goods (+0.08 pp) and energy (+0.05 pp).

Written by Lexy Nantu, Email: lexy@theinsiderstories.com