Expects key interest rates to remain at present or lower levels for an extended period. Based on unchanged overall subdued outlook for inflation, extending into the medium term.

Structural reforms essential. E.g. removing “labour-market rigidities”.

“We want markets to see our reaction function.”
Expects rates, including rate on deposit facility.
Assessment will remain the same as long as inflation remains “subdued”. [Not a great standard. What does it mean? Below 2%? No, that’s where it’s supposed to be.]

No connection between full-allotment commitment to June 2014 is not connected to the “extended period”.

Rate hikes priced into money market are unwarranted.

Baseline scenario is subdued, and risks are on the downside, for inflation.

Measures on credit growth have been effective in suppressing volatility. Otherwise, hard to assess success in the context of other communications. Partially successful on rates — depending on whether you compare pre-FOMC rates, or pre-ECB guidance rates.

Reasons for weak credit growth:
Weak economic demand
Heightened credit risk
Continued deleveraging by HH and co’s.
Fragmentation.

Has been some improvement on fragmentation — seeing capital inflows, and cross-country dispersion for deposit growth is the same as in 2007. On the lending side, there is still some fragmentation.
Note credit growth is a lagged indicator of growth.

Did not discuss the idea of data-based forward guidance. Guidance is consistent with strategic framework. [Data-based forward guidance would not be consistent with their framework. They don’t have a dual mandate.]

Talked about minutes. Gov council through richer comms would be helpful. At this early stage, can only speak generally. Comms should give an account of rationale. On the other hand, they are not a one-country set-up. So it’s important that any modification does not put the independence of the members into question. Gov council members sit in their personal capacity, acting in the interests of the euro. ACTING IN THE INTERESTS OF THE EURO.
A proposal will be put to the GC this autumn.

How is forward guidance more than a forecast? It is more. It is an expectation by a specific set of policy-makers. Not “it is expected”. “We expect”.

May not repeat the forward guidance if they judge that the journalists and the market understand that forward guidance is valid until further notice.

Forward guidance says interest rates are expected to stay where they are or go lower over the extended period. One could extract a reaction function (using the forecasts?) as some journalists have done.

Collateral changes: Do not weaken framework. Wanted risk-equivalence across all eligible assets. E.g. lower haircuts on ABS because transparency and standardisation have improved in the asset class. Also some other technical improvements have happened. E.g. covered bonds. Distinguished between retained and non-retained (more and less risky, respectively). Overall impact on collateral was minimal. At country level, negative impact has been at most 1%; and you have to judge that against the positive impact of previous decisions. E.g. Dec 2011, lowered rating on some ABS and introduced other credit claims; June 2012 eased ABS conditions; Dec 2012, allowed ABS and other credit claims in other currencies.

Deflation risk? A generalised fall in the price level, across broad categories of sectors, in a context of self-fulfilling expectations — do not see a risk of this in any country. See chance of sector-specific price falls in certain countries because of one-off or other local effects, or genuine relative price adjustments.

Actions of last summer had some benefits: spreads, rates, vol all fell. Produced a normalisation of financial markets. Also reduced fragmentation of funding. Now starting to see some improvement on the lending side, although just the very beginning. Also saw capital inflows begin. More generally, OMT has reduced general risk, as seen in significant reduction in TARGET2.

Fiscal consolidation is going well; structural reforms, countries have done to various different degrees. But in general, the situation is better than it was a year ago.

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