The ECB Is Concerned: Clear Message From Meeting Minutes

That is the main message from the just-released minutes of ECB's July meeting which stress the central bank's growing concerns about both the growth and inflation outlook. A 20bp deposit rate cut, a small tiering system, a repricing of the TLTROs and a restart of QE with some 30 billion euro per month could be Mario Draghi’s last hoorah

In its discussion on both the outlook for eurozone growth and inflation, the ECB’s assessment had become more pessimistic. As regards growth, the minutes say that it “was also considered that these downside risks had become more pervasive and that their persistence could ultimately also necessitate a revision to the baseline growth scenario”. Looking at inflation, the recent declines in both actual inflation and longer-term inflation expectations were “a matter of concern”.

The minutes suggest that there is a majority at the ECB in favour of a package of new measures, rather than a series of single measures

The official views and tone presented during the press conference in July were just a normal consequence of the discussion. The minutes do not say anything about how close the ECB is to actually act but reading between the lines, the July meeting was probably as close as it can get without actually acting. Interestingly, the minutes also suggest that there is a majority at the ECB in favour of a package of new measures, rather than a series of single 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”.

Hardly any hope that these concerns get less before September

Looking ahead, the “relevant committees” are still preparing different options for the Governing Council meeting on 12 Sept. 12. While most ECB members should have returned from summer vacation by now, the macro economic picture has not improved. To the contrary, the slowdown of the eurozone economy in the second quarter, tentative signs that external problems have reached the domestic part of the economy as well as somewhat lower oil prices and a stronger euro should weaken the inflation outlook further. Still, as illustrated by today’s PMIs, the eurozone is rather in a period of stagnation than at the risk of a severe recession.

There are increasing doubts that additional monetary easing will be a game-changer for the economic outlook

Against all of this, the ECB has a difficult task, preparing for its Sept. 12 meeting. At the July meeting, Mario Draghi’s comments at the press conference and recent comments by the Finnish central bank governor Olli Rehn have increased expectations. At the same time, however, there are increasing doubts that additional monetary easing will be a game-changer for the economic outlook.

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Interest rates across the entire board are close to record lows, financing conditions have never been more favourable and there are adverse effects stemming from unconventional measures. Still, to paraphrase Jean-Claude Trichet, the ECB’s has only one needle in its compass and that needle is price stability. With no signs of inflation picking up any time soon, doing nothing is not an option. However, when looking at the different options for September action, it is not always easy to find – what Peter Praet once called - a monetary policy case.

What will happen at the September meeting?

Here is what we think the "relevant" committees at the ECB's Governing Council will discuss as possible new measures in September.

All of the above means that the ECB finds itself in a rather uncomfortable position. It is to demonstrate its willingness and determination to act, while at the same time it also knows that monetary policy alone can longer solve the low-growth-low-inflation problem of the eurozone. However, doing nothing isn't really an option.

Therefore, we continue to see the ECB starting a final monetary firework at the September meeting: a 20bp rate cut of the deposit rate, a small tiering system, a repricing of the TLTROs and a restart of QE with some 30 billion euro per month could be Mario Draghi’s last hoorah before handing over to Christine Lagarde.

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Written By: ING Economic and Financial Analysis