The European Central Bank published the monetary policy accounts of the January 19th meeting. Reports showed that policy makers wanted to keep the pace of stimulus purchases unchanged and did not show any intention of scaling back the central bank’s QE purchases. The meeting minutes was in fact in stark contrast to the December meeting where some members expressed concerns on the loose monetary policy.
Many members agreed that the pick-up in inflation was only temporary and that there were still risks to the recovery in the region, leaving policymakers to agree that the ECB should keep policy steady. Some members even left the option open to increasing more stimulus if growth showed any signs of weakening.
“The Governing Council was seen as well advised to remain patient and maintain a ‘steady hand’ to provide stability and predictability in an environment still characterized by a high level of uncertainty,” the ECB’s meeting minutes said.
— ECB (@ecb) February 16, 2017
There was some flurry of activity initially after inflation started to rise strongly since December 2016. This prompted officials from Germany to openly criticize the ECB and called for scaling back of the QE program. However, latest figures showed that inflation gains came mostly on account of higher oil prices, which ECB officials view as being transitory and not the kind of inflation they expect to kindle. Following the strong rise in the headline inflation, core inflation has remained flat at 0.9%, prompting ECB officials to quickly point this out.
The central bank has purchased over 1.5 trillion euro worth of sovereign bonds since it launched the QE program two years ago and is expected to continue its bond purchases until the end of this year, albeit at a smaller pace starting March 2016.
ECB expected to remain on the sidelines for now
The central bank is expected to remain on the sidelines for the most part of this year with Netherland, Germany and France lined up for elections this year. Among the three, the outcome of the elections from Germany and France will be crucial for the future of the euro and the European Union. The elections also highlight the growing discontent among different member nations. France’s Marine Le Pen has repeatedly floated the idea of leaving the euro while German officials have often criticized the ECB for its easy monetary policy.
Experts believe that there will not be any significant policy changes from the ECB over the coming months with any move likely to come only after June following the Dutch and French elections.
ECB addresses bond shortage concerns
The meeting minutes also showed that the ECB was making changes to the way it lends the bonds for collateral after a shortage of bonds at the turn of the year threatened the way the financial markets functioned.
The ECB’s minutes also showed that there was extreme scarcity in the German and French bonds which increased just before the New Year as investors paid record rates to borrow the bonds for collateral.
The aggressive pace of bond purchases from the ECB along with higher collateral requirements and strict rules on bank dealing contributed to the shortage putting a squeeze on the government bonds availability.
“Against this background, the Governing Council should carefully monitor market developments and the use of the securities lending facilities, and stand ready to make further adaptations, if needed,” the ECB said in the minutes.
Some economists were expecting to see the ECB lower its bond qualification criteria to include other sovereign bonds as well as it was relatively well known that there was a significant bond shortage facing the ECB. However, the central bank brushed aside the concerns during its previous meetings.