ECB minutes confirm the “package” way
The minutes from the latest ECB meeting suggest that the ECB is likely to proceed with a full set of measures in September, confirming not only the indications from President Draghi following the meeting but also the very latest statements by Olly Rehn, calling for the need for an “impactful and significant” package.
This part of the minutes probably offering more insights into the next ECB stance is the one stating the preference for a package of measures. “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.”
While failing to give any clue on the size of the actions, these words explicitly refer to a combination of conventional and unconventional measures, confirming our central scenario for a limited rate cut accompanied by a reopening of net purchase programme, the latter combining both private and public programmes.
In its July meeting, the Federal Reserve decided to lower the target range for the federal funds rate to between 2 and 2¼ percent. From the minutes, this move is part of a recalibration of the policy stance, a mid-cycle adjustment needed in response to declining investment spending and manufacturing output, coupled with persistent uncertainties and downside risks not expected to fade any time soon. Monetary policy is not on a pre-set course and is expected to remain flexible and focused on the implications of incoming data.
The minutes of the FOMC meeting addressed a few relevant themes to frame its next policy actions:
- Monetary policy framework, a continuing discussion: better understanding of how forward guidance and asset purchases operate, acquired through experience, could allow the FOMC toproceed more confidently and pre-emptively in using these tools in the future if economic circumstances warranted.
- Economic assessment – resilient overall but persistent risks: strong labour market based on a sustained expansion of economic activity and limited inflationary pressures is the base case. Yet, a challenging global environment is expected to persist (disappointing global economic growth, trade policy uncertainty weighing on business confidence and firms’ capital expenditure plans; limited policy space for other policy actions to support aggregate demand in case of a downturn).
- Monetary policy decision – not a unanimous decision:all but two members agreed to the cut. During the discussion, however, it emerged that only “a couple” of participants preferred a 50bp cut because of low inflation, while “several” participants favoured maintaining rates unchanged due to the still resilient economy.
On the back of recent developments, the deterioration in trade disputes, the persistent global slowdown in the manufacturing sector and risks to financial conditions make an additional rate cut likely before year-end, followed by a further cut in Q1 2020.