The European Central Bank policymakers supported the proposal to design a stimulus package for the euro area as growth is likely to be weaker than earlier forecast, minutes of the July 24-25 Governing Council meeting showed on Thursday.
“The view was expressed that the various options should be seen as a package, i.e. a combination of instruments with significant complementarities and synergies, since experience had shown that a policy package – such as the combination of rate cuts and asset purchases – was more effective than a sequence of selective actions,” the minutes, which the ECB calls “account”, said.
In the July policy session, the ECB left its interest rates unchanged and altered its forward guidance to signal that they will be reduced in future.
“Members broadly supported the reintroduction of an easing bias to the Governing Council’s forward guidance on interest rates in the light of the weakness of the economic outlook and the muted inflation developments,” the minutes said.
“The easing bias was considered appropriate for addressing the risk of an unwarranted tightening of monetary conditions related to the short end of the yield curve in view of the persistent uncertainty surrounding global developments.”
ECB President Mario Draghi had signaled an interest rate cut as early as September, further alterations to forward guidance, and possibly a stimulus package that could include a tiering system for deposit rates and a fresh round of asset purchases.
A tiered deposit rate can partly reduce the burden of the cost banks pay on the cash they park at the ECB, but policymakers are doubtful of its effectiveness in reducing the adverse effects of negative interest rates on bank profitability.
“While members expressed broad agreement with initiating preparatory work on mitigating measures, 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,” the minutes said.
Based on the recent survey data, policymakers assessed that “there was now an increased likelihood that the economic slowdown or “soft patch” that had emerged last year would be more protracted than had previously been anticipated.”
Available “soft” indicators pointed to slower growth in the third quarter, raising more general doubts regarding the expected recovery in the second half of the year, which was worrying, the minutes said.
That said, policymakers chose to wait for more information from the September ECB staff projections as the positive fundamentals remained unchanged.
“Downside risks had become more pervasive and that their persistence could ultimately also necessitate a revision to the baseline growth scenario,” the minutes said.
Rate-setters also raised concerns regarding the recent declines in inflation expectations and they agreed that these warranted close monitoring.
Declines were no longer visible only in the market-based indicators but were now also apparent in survey-based indicators, which had fallen to historical lows, they pointed out.
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