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European Central Bank officials found in July that their new inflation strategy and changes to their commitment on the future path of interest rates could end up reducing the need for ultra-expansionary monetary policy.
Policy makers pledged last month that they won't raise borrowing costs until they see consumer prices sustainably growing at a 2% pace -- a shift in tune that led investors to push back expectations for liftoff.
The new guidance “did not necessarily imply ‘lower for longer' interest rates if it ultimately succeeded in anchoring inflation expectations at the target, as intended,” according to an account of the ECB's July 21-22 meeting.
Instead, the central bank's updates were seen as reducing “the risk of possible side effects, since it should help to shorten the time spent at very low interest rates and, all else being equal, lower the required volume of asset purchases.”
The Governing Council decided to save changes to their planned bond-buying path -- purchases are currently set to continue until shortly before the ECB starts raising rates -- for one of their next meetings. That raised concern among some officials that the ECB might be making too long a commitment.
“It was remarked that a recalibration of the interest rate forward guidance could be erroneously perceived by market participants as necessarily implying a longer period of net asset purchases owing to the link between rate guidance and forward guidance on the asset purchase program,” the account said.
New Strategy
The Governing Council's July discussion marked the beginning of bringing the ECB's policy in line with its new strategy -- the product of a year-and-a-half long assessment. Earlier that month, officials lifted their inflation target to 2% instead of the prior “below, but close to, 2%”.
Chief economist Philip Lane has since said that changes to plans for interest rates were only a first step in adapting policy to the findings of the review.
According to the account, some officials would have preferred an even stronger pledge on borrowing costs in July.
“Stepping up the forward guidance now and scaling it back later, when necessary, would be better for credibility than having to scale up the guidance later,” they argued, according to the summary of the discussion.
Separately, “a suggestion was made to include ‘knock-out' clauses in the forward guidance as a possible means to enhance credibility” and “mitigate financial stability risks.”
The next policy meeting is on September 9, when new economic projections will be made available and officials may re-evaluate the speed of their asset purchases.
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