ECB releases the account of its July monetary policy meeting - 26 August 2021

  • New forward guidance best understood as a set of conditions that would help guide ECB actions in pursuit of its inflation target
  • It was remarked that forward guidance on interest rates, if credible, should reduce the extent to which other instruments needed to be deployed
  • New formulation of the forward guidance was widely seen as finely balanced
  • The forward guidance language should clearly dispel the notion that 2% was a ceiling for inflation, given that the new strategy explicitly allowed for a moderate and transitory overshooting
  • Full account

The emphasis of the release is on the new forward guidance introduced but it isn't really telling us much of anything new at this stage. But it is worth highlighting some of the considerations pointed out among the discussion by policymakers:

In the discussion, members put forward a number of considerations. On the one hand, the case was made for strengthening the forward guidance on interest rates even further. First, policy rates remained constrained by the lower bound. Second, medium-term inflation expectations continued to stand below the inflation target. Third, markets were pricing in a lift-off of the key ECB policy rates at a time when inflation over the medium term was still expected to be well below two per cent. This could be interpreted as a sign that the current forward guidance was insufficient to guide market expectations. From this perspective, it was felt that the forward guidance could be strengthened by formulating the lift-off conditions in terms of realised inflation rather than expected inflation. The point was made that 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.On the other hand, it was cautioned that requiring inflation to durably reach two per cent at an earlier point in time would risk undermining the medium-term orientation of monetary policy. In addition, given the significant lags with which monetary policy was transmitted to the real economy, it would amount to intentionally overshooting the inflation target. In this regard, it was recalled that other instruments were continuing to provide strong monetary policy support at the lower bound. The point was made that some loosening of the monetary policy stance would occur automatically, without substantial changes to the forward guidance, because the somewhat higher inflation target in the new strategy would in any case likely imply a postponement of the lift-off date.