Over the coming weeks more data would become available, which would provide improved visibility about how the various forces at play would influence the medium-term inflation outlook. In this environment, inflation pressures were expected to remain subdued on account of weak demand, lower wage pressures and the recent appreciation of the euro exchange rate. The appreciation of the euro resulted, in part, from the broad weakness of the US dollar. Members emphasised that in order for the NGEU package to fully achieve its potential, it would need to be firmly rooted in sound structural policies conceived and implemented at the national level in order to ensure strong ownership. High economic uncertainty was seen to weigh on consumption, with the level of precautionary savings in particular being dependent on developments in household confidence. In this context, it was also emphasised that the ECB’s inflation aim was symmetrical and that the Governing Council would respond with the same determination to sustained downside deviations as to sustained upside deviations from the inflation aim. High-frequency indicators, such as data on labour mobility patterns, as well as the Purchasing Managers’ Index for the services sector, were signalling more subdued activity and retail sales had lost some momentum. stress that the incoming information continued to signal a strong resumption of euro area economic activity, broadly in line with previous expectations, although the recovery remained incomplete, uneven and subject to considerable uncertainty; emphasise that inflation pressures were expected to remain subdued on account of weak demand, lower wage pressures and the appreciation of the euro exchange rate; note that the unchanged projection for headline inflation in 2022 masked an upward revision to core inflation (reflecting the positive impact of monetary and fiscal policies, albeit muted by the appreciation of the euro) that was offset by the revised path of energy price inflation; reiterate that ample monetary policy stimulus would remain necessary to support the economic recovery and to offset the negative impact of the pandemic shock on the projected path of inflation; highlight that, in the current environment of elevated uncertainty, significant economic slack and increased exchange rate volatility, the Governing Council would monitor incoming information very carefully and continue to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moved towards its aim in a sustained manner. 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It was argued that the moderate improvement in inflation expectations was mostly due to the monetary policy decisions taken in June and that the prospect of a further appreciation of the exchange rate implied downside risks to inflation. Since 1 January 1999 the European Central Bank (ECB) has been responsible for conducting monetary policy for the euro area - the world’s largest economy after the United States. Survey data indicated that the perceived lack of demand was increasingly becoming a drag on investment – in particular business investment – in the second and third quarters of 2020. However, the view was also expressed that confidence in the baseline scenario had increased notably compared with June and there was also increased confidence that governments would do what was needed to stabilise the economy in the event of future adverse shocks. In this environment, it was important for the Governing Council to underline its readiness to adjust all of its instruments, as appropriate, to ensure that inflation moved towards its aim in a sustained manner. At the same time, there was no room for complacency. The ECB’s monetary policy measures were providing crucial support to the recovery of the euro area economy. This week's ECB Decision promises a change after the suggestion by Lagarde on October 29th that, "the Governing Council will recalibrate its instruments" "ECB sees 2021 inflation at 1% (vs 0.8% seen in June)." There was broad agreement among members that there was no room for complacency, as emphasised by Mr Lane in his introduction. Reproduction is permitted provided that the source is acknowledged. In this context, it was nonetheless stressed that, notwithstanding the positive contribution of monetary policy to underlying inflation dynamics, the baseline scenario in the September projections still foresaw inflation remaining well below the pre-crisis path over the projection horizon. There was now also greater confidence that governments could prevent their health systems being overwhelmed and that they could contain the spread of the virus without a full lockdown and the ensuing severe harm to the economy. One factor was the sectoral composition of stock markets as, despite the recent correction, the technology sector continued to benefit most from the pandemic. Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt am Main on Wednesday and Thursday, 9-10 September 2020. Since the July monetary policy meeting, market-based measures of longer-term inflation expectations had continued to recover from the historical lows reached in mid-March, but remained at very depressed levels. It was underlined that uncertainty surrounding inflation was exceptionally high at present. The appreciation of the euro resulted, in part, from the broad weakness of the US dollar. ECB Press Releases, IMFBlog writes Chart of the WeekWhen Inequality is High, Pandemics Can Fuel Social Unrest, Amol Agrawal writes European banking’s moment of merger truth, Amol Agrawal writes The American Empire Across the Globe, Amol Agrawal writes Regional market integration and the emergence of a Scottish national grain market. Alongside a resurgence of the virus, the winter months could be expected to be more challenging from a medical perspective. The projected inflation profile also reflected an increase in oil prices as embodied in futures markets, which depended on adherence to the recent agreement by OPEC to cut production. While the PEPP was currently seen as the primary instrument for providing additional monetary policy accommodation, it was noted that further cuts in policy rates and changes to the conditions of the TLTROs were also part of the toolkit for providing additional monetary policy accommodation, if necessary. Most of the adjustment in the labour market had stemmed from a decline in average hours worked, which mainly reflected the impact of job retention schemes. The September ECB staff macroeconomic projections signalled that output would rebound in the third and fourth quarters by 8.4% and 3.1% respectively. While the rebound in economic activity had resulted in some recovery in firms’ revenues and a shift in loan demand towards longer-term loans, the uncertainty over the economic outlook was likely to cast a shadow over future loan demand. Bank lending conditions remained very favourable, with lending rates continuing to stand at historical lows. While there was an upward revision to inflation excluding energy and food in the latest staff projections, headline inflation was projected to be 1.3% in the final year of the projection horizon, thereby remaining below the projected pre-crisis path and some distance from levels in line with the Governing Council’s inflation aim. The September ECB staff projections foresaw an increase in headline inflation from 0.3% in 2020 to 1.0% in 2021 and 1.3% in 2022. With regard to the monetary analysis, members broadly agreed with the assessment provided by Mr Lane in his introduction. Authors. However, the scale of the upward revision to core inflation was muted by the appreciation of the euro. Inflation had been persistently below levels consistent with the Governing Council’s inflation aim and inflation expectations remained close to their historical lows, amplifying risks to the anchoring of medium-term inflation expectations. The outlook remained surrounded by high uncertainty and the balance of risks continued to be tilted to the downside. Government bond spreads too had reached, or were close to, their pre-crisis levels and investment-grade corporate bond spreads had fallen by nearly 20 basis points since the Governing Council’s previous monetary policy meeting. As regards the external environment, members broadly shared the assessment provided by Mr Lane in his introduction. In the context of the announcement by the US Federal Reserve System of a revised Statement on Longer-Run Goals and Monetary Policy Strategy, it was important to highlight that the ECB’s strategy review had been delayed because of the COVID-19 pandemic and that it would resume shortly and would be an important focus of the Governing Council’s work over the next year. Generally, it was felt that more time was needed to better understand the possible impact, including the timing, of fiscal stimulus at the domestic and European levels. With regard to price developments, there was broad agreement with the assessment presented by Mr Lane in his introduction. While the PEPP was currently seen as the primary instrument for providing additional monetary policy accommodation, it was noted that further cuts in policy rates and changes to the conditions of the TLTROs were also part of the toolkit for providing additional monetary policy accommodation, if necessary. A more positive assessment regarding the future pattern of private consumption was based on the view that people would learn to live with the virus. The ECB’s monetary policy measures were providing crucial support to the recovery of the euro area economy. The unchanged projection for inflation in 2022 masked an upward revision to core inflation (reflecting the positive impact of monetary and fiscal policy measures). The speed of the rebound was broadly in line with the expected pace set out in the June 2020 projections. The unchanged projection for inflation in 2022 masked an upward revision to inflation excluding energy and food – in part reflecting the positive impact of the monetary and fiscal policy measures – which was largely offset by the revised path of energy prices. Save my name, email, and website in this browser for the next time I comment. Turning to the euro area economy, real GDP had contracted by 11.8%, quarter on quarter, in the second quarter of 2020. Turning to euro area price developments, euro area annual HICP inflation had decreased from 0.4% in July to −0.2% in August (according to Eurostat’s flash estimate). This allowed the Governing Council to effectively stave off risks to the smooth transmission of monetary policy. In particular, investors and forecasters had become more optimistic about the prospects for the early availability of a vaccine. In discussing recent developments in inflation expectations, members noted that longer-term inflation expectations, as reported in the ECB’s Survey of Professional Forecasters, had fallen to 1.6%, the lowest level since the start of Economic and Monetary Union. It was also underlined that it would take some time for a vaccine to become widely available and until that point concerns over the economy would remain. To do this, we use the anonymous data provided by cookies. The euro had continued to appreciate against the US dollar (+3.8%) and in nominal effective terms (+1.7%) against a trade-weighted basket of 42 currencies. It needed to be highlighted that the current environment was surrounded by elevated uncertainty, which required the Governing Council to carefully assess all incoming information, including developments in the exchange rate, with regard to the implications for the medium-term inflation outlook. Finally, it needed to be highlighted that fiscal policy continued to be critical to support the recovery of the euro area economy and to provide important funding support to those hardest hit by the pandemic. Empirical evidence suggested that a marginal increase in inflation expectations tended to raise stock valuations, and this effect was considerably greater when real rates were in negative territory. Real ten-year US Treasury yields were currently close to historical lows and, for the first time since 2013, were lower than equivalent yields in the euro area. Reference was made to the language that had been used by the Governing Council on exchange rate volatility in 2017-18 and it was generally felt that the proposed communication was similar and appropriate at the current juncture. Prior to that is the policy announcement due at 1145 GMT. Turning to the euro area economy, real GDP had contracted by 11.8%, quarter on quarter, in the second quarter of 2020. At the same time, it was noted that the upward impact on growth of further fiscal measures, which were not yet incorporated in the projections, would imply a smaller output gap, which would normally translate into a better inflation outlook. Moreover, in the near term price pressures would remain subdued owing to weak demand, lower wage pressures and the appreciation of the euro exchange rate, despite some upward price pressures related to supply constraints. Recently, momentum had slowed in the services sector compared with the manufacturing sector, which was also visible in survey results for August. A second driver was likely related to monetary policies implemented in the United States and the euro area, in part reflecting differences in conventional policy space before the pandemic. However, there were also a number of downside risks – including the probability of a no-deal Brexit, which seemed to be increasing. Reference was also made to the large stock of accumulated household savings, which could be drawn down more quickly than foreseen in the staff projections and underpin a rebound in consumption growth in the coming years. In any case, the future roll-off of the PEPP portfolio would be managed to avoid interference with the appropriate monetary policy stance. Since the July monetary policy meeting the recovery in oil prices seemed to have stalled, with prices declining by 9.0% – driven by a combination of decelerating demand growth and higher supply. Annual real GDP growth was projected to fall by 8% in 2020 and to increase by 5% in 2021 and 3.2% in 2022. This would allow buffers to be built up in case market turbulence and fragmentation were to re-emerge. ... ECB meeting overshadowed by concerns over strong euro, deflation. Headline inflation in 2022 did not increase, as the upward revision to core inflation was offset by the changed profile of the path of energy price inflation. On the basis of current and futures prices for oil, and taking into account the temporary reduction in the German VAT rate, headline inflation was likely to remain negative over the coming months before turning positive again in early 2021. Weakened bank balance sheets associated with rising firm indebtedness and defaults could, in turn, lead banks to charge higher lending rates to their customers and to cut back on new loans even though bank lending rates were currently still at historically low levels. Following strong increases during the early months of the pandemic, the annual growth rate of loans to non-financial corporations had remained broadly stable in July, standing at 7.0%. Moreover, inflation had been persistently below levels consistent with the inflation aim and inflation expectations remained at subdued levels, which posed a risk to the perceived ability and determination of the ECB to deliver on its mandate. In the prevailing environment of high uncertainty, keeping a steady hand with respect to monetary policy was seen as most appropriate. The configuration of monetary policy was supporting the flow of credit to households and businesses and contributing to accommodative funding conditions in all parts of the economy. Required fields are marked *. Members widely agreed that the ECB’s monetary policy measures were providing crucial support for the recovery of the euro area economy and underlying inflation pressures. Learn more about how we use cookies, We are always working to improve this website for our users. Broad money (M3) growth had continued to rise, reflecting domestic credit creation and the ongoing asset purchases by the Eurosystem, as well as precautionary motives which fostered a heightened preference for liquidity in the money-holding sector. Rate since July the full effects of the pandemic could have the effect of keeping household elevated. 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