ECB's September minutes show concerns about downside risks

The account of the monetary policy September meeting suggests that relative to July, there was broad agreement among governing council (GC) members about the downside risks posed to the euro area recovery and inflation by worsening global conditions, especially developments in EM and China. The key conclusion of the GC was that "the downside risks had clearly increased, and there was a need to carefully monitor developments and policies outside the euro area". Critically, the GC shared the view that, while euro area inflation was expected to pick up, there had been a recent deterioration in the outlook for inflation that needed to be assessed further to distinguish between temporary and more persistent factors that were relevant for the medium term. In their assessment of the risks surrounding the inflation outlook, there was broad agreement that the risks were tilted to the downside, given lower commodity prices, a stronger euro exchange rate and a somewhat lower growth outlook.

Against this background, there was wide agreement that, while recent market volatility was a sign of increased risk and heightened uncertainty over the economic outlook, it was too early to form a sound judgment on whether such developments would have a lasting effect on euro area economic developments and, in particular, the medium-term outlook for inflation. It was felt that more time was needed to gain a better understanding of the underlying driving forces and to analyse the factors behind the recent volatility in financial and commodity markets in greater depth.

There was also wide agreement for stressing that the monthly asset purchases of €60bn would be fully implemented until the end of September 2016, and beyond if necessary, and, in any case, until a sustained adjustment in the path of inflation, consistent with the Governing Council's aim of achieving inflation rates below, but close to, 2% over the medium term, was visible. Regarding non-standard monetary policy measures, the Governing Council decided to increase the issue share limit from the initial 25% to 33%, subject to a case-by-case verification that this would not give the Eurosystem blocking minority power, in which case the issue share limit would remain 25%. In some cases, the Eurosystem could not buy more than 25% of the issue, but these represented a small share of the overall outstanding amount of the PSPP-eligible universe.

Regarding the revised macroeconomic outlook, GC members underlined that the role of investment was critical, both for the short-run outlook and in the medium term, as it was an important determinant of potential growth. It was observed that investment had remained very subdued in the wake of the crisis. Current heightened uncertainty possibly weighed further on the investment outlook beyond what was embodied in the September 2015 ECB staff projections, which showed investment picking up in 2015 and 2016, with a small downward revision in 2016. Against this background, an improvement in the conditions for both public and private investment was called for, and support was expressed again in this context for the European Commission's investment plan and the growth-supportive role of a well-functioning public infrastructure.

Overall, the headline inflation is likely to miss the ECB's target for a long period and continue to warn that it may take a long time, certainly longer than envisaged by the ECB (September 2016), for headline and core inflation to return to a sustained path that is consistent with its medium-term inflation target. Taking into account the latest climb in Brent Crude oil prices, the headline HICP inflation is likely to average 0.1% this year and +1.0% next.

"We continue to expect the GC to ease monetary policy further before year-end. A first step could be to extend the asset purchase programme until at least a later date than September 2016, which we think could be announced as early as October, to reinforce the forward guidance. Increasing the size and scope of asset purchases would be the next step, but we think it is unlikely to be decided in October unless a bigger shock materialises in the meantime. It is more likely to be decided at the December meeting when the ECB will review staff macroeconomic projections. Last but not least, we believe that a cut in the deposit facility rate is possible and could be deployed during the first quarter of 2016 as long as the Fed does not increase rates in December, in line with our expectations", says Barclays.