In response to "persistent" low inflation, the Governing Council of the European Central Bank (ECB) on Thursday 25 July asked its services to prepare new measures that would further ease an already very accommodating monetary policy, including a reduction in interest rates or a resumption of the quantitative easing (QE) operation.
"The Governing Council also underlined the need for a highly accommodative stance of monetary policy for a prolonged period of time, as inflation rates, both realised and projected, have been persistently below levels that are in line with its aim", ECB President Mario Draghi told reporters in Frankfurt. And he added: "Accordingly, if the medium-term inflation outlook continues to fall short of our aim, the Governing Council is determined to act (and) stands ready to adjust all of its instruments to ensure that inflation moves towards its aim in a sustained manner."
The European institution's services have been asked to examine, by the next meeting of the Governing Council on Thursday 12 September, various "options" including how to strengthen forward guidance on interest rates, the establishment of a dual system for the remuneration of deposits and the launch of a new massive securities buyback operation.
Admitting that the decision to explore new accommodating measures was not unanimous, Mr Draghi justified it by describing a deterioration in the economic situation in the euro area. While economic expansion remains and employment continues to grow, the economy is "getting worse " in the manufacturing sector, he noted. According to him, the risk balance looks set to turn downwards due to geopolitical uncertainties, such as the trade war and the renewed risk of a no-deal Brexit, with Boris Johnson coming to power in London.
Previously envisaged for the second half of 2019, "a rebound in the economy has now become less likely", said the President of the ECB, who will be replaced in early November by Christine Lagarde of France (see EUROPE 12304/2).
Asked about the possibility of relaunching a massive securities buyback operation only 9 months after the completion of a first quantitative easing that lasted more than 3 years (see EUROPE 12159/14), the former Governor of the Banca d'Italia considered that this type of instrument had produced results, while admitting that the transmission of the effects of monetary policy to the real economy was taking "longer than expected".
Further possible decrease in interest rates. In addition, the ECB stressed that its main key ECB interest rates, which finally remained unchanged on Thursday, will remain unchanged - or "lower" - until the end of the first half of 2020, at least until the medium-term inflation path is permanently aligned with the ECB's traditional mission, namely a lower level, but close to 2%.
Inflation, which was measured at 1.2% in May and 1.3% in June, is expected to fall again and gradually rise again by the end of 2019.
Has the mission of the monetary institute changed? "Not really," Mr Draghi said, although several governors want to continue discussions on the issue of symmetry in monetary policy actions. Symmetry means that strong actions are taken, not only when inflation is below 2%, but also when it exceeds such a threshold, he added.
In its statement, the Governing Council said it was "determined to act, in line with its commitment to symmetry in the inflation aim". (Original version in French by Mathieu Bion)