ECB Monetary Policy Meeting Accounts: The need to revise forward guidance on interest rates was emphasised

The ECB released accounts of its July 21-22 monetary policy meeting. It noted that:

• Members agreed that it was necessary to align the forward guidance on interest rates with revised formulation of price stability objective in ECB’s new monetary policy strategy;
• The need to revise forward guidance on interest rates was emphasised, in order to provide a credible commitment to bringing inflation up to new target;
• Reformulated forward guidance was best understood as a set of conditions that would help guide ECB’s actions in pursuit of its inflation target, as defined in the new strategy; it did not necessarily imply “lower for longer” interest rates if it ultimately succeeded in anchoring inflation expectations at target, as intended;
• It was remarked that forward guidance on interest rates, if credible, should reduce extent to which other instruments needed to be deployed;
• New formulation of forward guidance was widely seen as finely balanced;
• It was noted that forward guidance language should clearly dispel notion that 2% was a ceiling for inflation, given that new strategy explicitly allowed for moderate and transitory overshooting;
• Members put forward a number of considerations. On one hand, the case was made for strengthening the forward guidance on interest rates even further… On the other hand, it was cautioned that requiring inflation to durably reach 2% at an earlier point in time would risk undermining medium-term orientation of monetary policy;
• Credibility of Governing Council’s forward guidance was seen as key to its success