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ECB Shadow Council Council Sees Changes to Forward Guidance

A majority of members argue for a change in the central bank’s forward guidance.

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The Shadow Council members see no need for the ECB to change its course to react to the situation in Italy. Quelle: dpa

Frankfurt Growth and Inflation Forecasts Revised Upward
Compared to three months ago, members raised their inflation forecast slightly for 2018 from an average of 1.5 percent to 1.6 percent, above the ECB's staff projections last December. Members kept the forecast unchanged for 2019 at 1.5 percent and expect 1.6 percent on average for 2020.
The Shadow Council’s mean forecast for GDP growth was revised upwards from 2.1 percent to 2.3 percent for this year, in line with the ECB staff projections from December. Members kept the forecast for 2019 at 1.9 percent. For 2020 they expect 1.6 percent on average.

Shadow Council macroeconomic forecasts

(ECB’s December projections in brackets)
20181.6 (1.4)2.3 (2.3)
20191.5 (1.5)1.9 (1.9)
20201.6 (1.7)1.9 (1.7)
Contributors: M. Annunziata; E. Bartsch; A. Bosomworth; S. Broyer; W. Buiter; J. Callow; J. Henry, J. Krämer.

Remove Easing Bias in Forward Guidance

A majority of Shadow Council members called for changes in the forward guidance. Several argued that the ECB should revoke its pledge to increase its bond-buying program if needed. Some members also want to cancel the commitment to keep rates at their current level or below, and “well past” the horizon of the net asset purchases – while several others argued that such a move would lead to an undesired appreciation of the Euro. Two members also argued for a change in communication strategy, namely that only the President should communicate changes to the Governing Council’s policy baseline. One member also suggested the ECB should no longer link its forward guidance to QE and to stress all its instruments instead.

Some members expressed confidence that price stability will eventually be secured – while several others argued that the ECB has less control over inflation. Several members stressed the medium-term nature of the inflation target of close to 2 percent
and said the ECB should emphasize that it will take longer to reach it. One member suggested it should target a corridor of 1 to 3 percent instead. Another member argued for a “strategy of comprehensive stabilization” which puts more emphasis on financial stability.

Concern about the rise of the Euro

On the rise of Euro, opinions were mixed. Some members said it simply reflects the better economic outlook in the Eurozone, while others expressed concern that a further appreciation of the Euro could jeopardize economic expansion.

One member argued that a currency war is already underway, and that the central banks are already taking the exchange rate into account and reacting to each other. The member argued that the ECB president should talk down the Euro, for example, by saying that it is currently too high. Another member objected to that, arguing the ECB would not be allowed to target the exchange rate under its mandate and because of international treaties. Therefore, it could not do so explicitly. Another possibility mentioned was to influence the exchange rate by cutting interest rates further.

MemberAffiliationFixed rate        Deposit rate
José AlzolaThe Observatory GroupUnchanged       Unchanged    
Marco AnnunziataGeneral ElectricUnchangedUnchanged        
Elga BartschMorgan StanleyUnchangedUnchanged    
Andrew BosomworthPimcoUnchangedUnchanged       
Sylvain BroyerNatixisUnchangedUnchanged                  
Willem BuiterCitigroupUnchangedUnchanged                 
Jacques CaillouxRokos CapitalUnchanged   Unchanged                   
Julian CallowElement CapitalUnchangedUnchanged      
Janet HenryHSBCUnchangedUnchanged             
Merijn KnibbeWageningen UniversityUnchangedUnchanged      
Fabian LindnerIMK UnchangedUnchanged 
Jörg KrämerCommerzbank +0.25+0.25
Thomas MayerFlossbach von Storch
Lucrezia ReichlinLondon Busines School UnchangedUnchanged 
Richard WernerUniversity Southampton +0.5                   +0.5                   

Frankfurt, 1st March, 2018
Jan Mallien and Frank Wiebe

Proofed by Jeremy Gray

Background information

The ECB Shadow Council was founded in 2002 upon an initiative of Handelsblatt, the German business and financial daily. It is an unofficial panel, independent of the ECB/Eurosystem, and comprising fifteen prominent European economists drawn from academia, financial institutions, consultancies, companies and research institutes.

The Shadow Council usually convenes by telephone conference on a quarterly basis. Its discussions are intended to formulate an opinion as to what monetary policy decision its members believe that the ECB's Governing Council ought to undertake, both at its forthcoming meeting and also on a three month horizon. Shadow Council members are encouraged to submit their own economic projections for euro area activity and inflation on a monthly basis, which constitutes the panel's forecast consensus as published each month.

The Shadow Council's discussions and recommendations differ from surveys of economists concerning the outlook for ECB interest rates because the Shadow Council recommendation expresses the majority view of its' members opinion about what the ECB should do, rather than what they forecast it to do (and hence the "normative" views as expressed by Shadow Council members on what they consider the ECB ought to do can and often do differ from what they might say they expect the ECB to do). This "normative perspective can, however, give an early indication of shifts in the balance of opinion in the expert community, as can be seen by comparing the historic recommendations of the Shadow Council against subsequent decisions undertaken by the ECB Governing Council.

Members of the Shadow Council base their recommendations on the ECB's objectives as defined under the EU Treaty, though Shadow Council members do not necessarily adopt exactly the ECB's specific interpretation of its mandate: most Shadow Council members consider that a medium term inflation objective of two percent with a symmetric tolerance band around it would be clearer, more realistic and more appropriate than the definition adopted by the Governing Council, which defines price stability as an inflation rate of "below, but close to, two percent", in the medium term.

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