European Central Bank officials in March discussed a larger rate cut and exempting some deposits from negative rates amid growing concern about the inflation outlook in the euro area.
“A sharper rate cut could be considered, together with indications that the effective lower bound would have been reached for all practical purposes,” according to the accounts of the March 10th governing council meeting published on Thursday.
Officials also discussed the possibility of exempting some bank reserves from the negative deposit rate but decided against it, partly due to its complexity.
ECB president Mario Draghi announced a comprehensive easing package last month against the backdrop of falling euro-area prices and a fragile recovery. Rate cuts, more asset purchases and new long-term loans were among the measures, and the record shows this was a response to an increased risk of second-round effects, where weak inflation feeds through to wages and spending.
The accounts, which don’t reveal policymakers’ names or their voting record, show that while governing council members “widely” agreed on the need for further policy action, support for the various parts of the package varied.
The generous incentives for banks that expand lending received “very broad support,” while extending asset purchases to corporate bonds received only “broad support.”
On negative rates, most members judged a 10 basis-point cut appropriate for now, though this “would not rule out the possibility and prospect of further cuts if warranted.”
On an exemption for some of the excess deposits, “doubts were expressed in view of the overall complexity of the such a system from an operational perspective and considering that there was little evidence of negative side effects,” according to the accounts.
The introduction of such a system for the deposit rate, similar to that used at other central banks with negative rates including the Swiss National Bank, would have the effect of freeing greater room to cut the rate further below zero by easing the burden on banks, according to analysts.
The SNB’s deposit rate is at minus 0.75 per cent.
The March 10th discussion took place against the backdrop of growing concerns among policy makers about the inflation outlook for the euro area.
At that meeting, the ECB published new staff projections forecasting inflation at 0.1 per cent this year and rising to 1.6 per cent in 2018.
“The importance of halting the decline in inflation expectations was emphasized,” the accounts showed.
“Wage increases had already turned out much lower than previously expected,” it said. “Overall, risks of second-round effects appeared to have increased.”
Those concerns have since materialised, ECB vice president Vitor Constancio told the European Parliament in Brussels on Thursday.
“One of the problems is that we see now that there are second-round effects,” he said. “Headline inflation being negative is contaminating the core inflation when we exclude the price of energy and processed foods.”