First ECB Minutes Reveal Thinking Behind January QE

(RTTNews) - The European Central Bank on Thursday released the minutes of its monetary policy meetings for the first time that revealed how the deliberations went that led to the approval of the EUR 1.1 trillion quantitative easing in the January session.

"A large majority of voting members" supported the decision to announce the EUR 1.1 trillion scheme that included buying government bonds, the bank said in the minutes of the January 22 rate-setting session.

Further, members also broadly agreed that purchases of sovereign debt appeared to be the only instrument of sufficient scope to provide the necessary monetary stimulus to deliver on the ECB's price stability objective.

"Members broadly shared the assessment that inflation dynamics had continued to be weaker than expected, economic slack had remained sizable and money and credit developments had continued to be subdued, notwithstanding recent more positive monetary developments," the minutes said.

"The Governing Council was thus faced with heightened risks of too prolonged a period of too low inflation."

Eurozone consumer prices declined for the second straight month in January largely due to lower energy prices, posting the biggest annual fall since 2009. Falling prices complicates ECB's aim to keep inflation 'below, but close to 2 percent'.

While all members considered asset purchases, including sovereign bond purchases, among available policy options, some members argued that this instrument should only be used in contingency situations, the ECB minutes said.

They also agreed that the existing monetary policy measures adopted in June and September last year would fall short in quantitative terms. Members also broadly shared the view that the conditions were fully in place for taking additional monetary policy action at the January meeting.

Some policymakers were of the view that corporate bond purchases were 'the most natural extension' of existing stimulus measures. However, it was concluded that their potential to boost inflation was small. Members also said that this asset class must be considered in future, if needed.

The bank had said earlier that the summary of discussions would be in 'an unattributed form', which meant no individual members will be named.

Germany had voiced strong opposition to the move to purchase bond purchases in the run up to the January meeting and continue to do so.

By remaining silent on the voting pattern within the policy-making body, the bank risks drawing criticism of lack of transparency. That said, the Governing Council takes most decisions by consensus rather than votes.

Since the ECB sets the policy for a group of countries, the move would serve to shield individual policymakers from possible political pressure, thereby safeguarding the sanctity of central bank independence.

The ECB's rate-setting body led by President Mario Draghi consists of six members of the ECB's Executive Board and the national central bank governors of the 19 euro area countries.

Policymakers also considered the possible moral hazard implications for Eurozone governments due to the ECB's decision to buy government bonds, the minutes said. They concluded that the effectiveness of the measure was dependent on the appropriate action such as growth-friendly fiscal policies and structural reforms.

Regarding the risk-sharing with national central banks, or NCBs, a kind of first for the ECB, some members raised the issue of perceptions of a lack of unity and sought full risk-sharing. Meanwhile, some argued for the same to underline the singleness of monetary policy.

The view in favor of risk-sharing was that it "would be more commensurate with the current architecture of Economic and Monetary Union", the minutes said.

Under the QE plan, purchases of sovereign debt will be 12 percent of the total purchases and these will be purchased by NCBs and will be subject to loss sharing. The rest of the debt purchased by NCBs will not be subject to loss sharing. The ECB will hold 8 percent of the asset purchases. Hence, 20 percent of the additional asset purchases will be open for risk sharing.

On the size of the QE, ECB Executive Board member and Chief Economist Peter Praet had suggested EUR 50 billion of monthly purchases, which was also in line with market expectations. However, there was broad support to exceed that to accelerate the impact of the measure. Consequently, it was decided to buy EUR 60 billion debt starting March and to last until September 2016.

"Members agreed to make the termination of purchases contingent on the evolving path of inflation being consistent with the Governing Council's price stability objective. This provided an important element of forward guidance," the minutes said.

In December last year, the ECB had announced its decision publish the minutes, which it calls 'accounts' of Governing Council monetary policy discussions, starting with the meeting on January 22. The accounts will be released four weeks after each meeting.