Frankfurt — European Central Bank (ECB) policy makers broadly agreed last month on extending the bank’s asset-purchase scheme but a decision to keep it open-ended appeared to generate fiercer debate, minutes of the meeting released on Thursday showed.
Having to reconcile rapid economic growth with anaemic inflation, the ECB opted last month to halve its asset purchases while extending them by nine months, hoping that gentler but longer stimulus would still keep growth strong enough to generate inflation.
Markets promptly pushed out any expectation for a rate hike until late 2019, interpreting the October move as a promise for even more stimulus, rather than taking the purchase cut as policy tightening.
While the nine-month extension of the scheme at €30bn a month enjoyed broad support, the account of the meeting indicated that policy makers debated a range of alternatives and were far from unanimous in keeping the scheme open-ended.
"An end date was viewed (by a few) to be well justified in anticipation of further progress towards a sustained adjustment in the path of inflation on the basis of the better than expected growth momentum, diminishing risks and continued favourable financing conditions for the real economy," minutes of the October 26 policy meeting said.
The dissenters argued that even if markets did not anticipate a clear end date, the reaction would be limited and in any case, the economy was able to handle tighter financing conditions given the solid growth path.
In a further sign of diverging views, some policy makers argued that the ECB should stop linking its asset buys to the path of inflation and should instead reference to its overall monetary policy stance.
The debate highlights the split in the governing council and suggests any further extension of the asset purchase scheme would run into opposition, even if inflation will miss the ECB’s target of almost 2% for years to come.
The ECB’s problem is that while the euro zone economy has expanded for 18 consecutive quarters, its best run in a decade, inflation has undershot the bank’s target for five years, threatening the ECB’s credibility since inflation is its primary mandate.
But much of the bank’s policy firepower is already exhausted after €2.2-trillion worth of bond buys so the ECB is under pressure to shift to lighter but more protracted stimulus, giving itself even more time to raise inflation.
Its biggest puzzle is that while unemployment is falling quickly, wages are not responding, throwing into doubt a long-standing relationship between the two indicators. Other regions, including the US, are facing a similar dilemma.