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ECB Shadow Council Members vote for another rate cut

At the meeting of the Shadow ECB Council on 29 April, 2013, a majority of 12 members recommended a cut of the ECB’s main refinancing rate by a quarter percentage point to 0.25 per cent.

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Two favoured keeping the rate unchanged. One member argued a hike by 25 BP would be appropriate. Most members still see a need for the ECB to go beyond cutting rates and embrace more aggressive and unconventional measures to kick-start bank lending and to get the economy out of recession.


GDP growth forecasts cut again

Members reduced their forecasts again for growth and inflation this year and next. After a decline of 0.5 per cent in 2012 and 0.6 per cent in 2013 members on average expect 0.7 per cent GDP growth in 2014. Inflation forecasts were also cut again. It now expected to fall to 1.5 per cent this year and to stay at this level in 2014.


Shadow Council macroeconomic forecasts (Forecast means in %, previous forecasts in brackets)




20131.5  (1.7)-0.6  (-0.4)
20141.5  (1.6)0.7 (0.8)

Contributors: E. Bartsch; S. Broyer; J. Cailloux; J. Callow;  J. Kraemer, J. Henry


Rates near zero and more aggressive measures needed

In light of the record level of unemployment in many countries and in the euro area as a whole, the decline of inflation, which is projected to continue, and an expected second year of shrinking euro area GDP, a very large majority (12 out of 15) favoured a cut of the Main Refinancing Rate by 0.25 per cent, which the ECB last lowered to 0.5 per cent early May.

Several members mentioned that cutting rates would help to fend off the relative strength of the Euro that was seen as hurting the economy especially in the peripheral countries.

Two members said rates should be left unchanged on the grounds that further cuts could be counterproductive.

One member voted for bringing the main refinancing rate back to 0.5 per cent essentially to signal the fiscal authorities that they need to address the economic situation of the euro zone instead of relying on monetary policy. He also argued that a prolonged period of abnormally low rates was distorting economic incentives.

Some members argued that the deposit rate, currently at zero, should be lowered with the main refinancing rate into negative territory to provide further accommodation. Working the interest rate channel would involve fewer risks than unconventional measure like asset purchases, some said. Some members agreed with this view but preferred to delay the use of this tool to study the economic development and the efficiency of this tool.

While some members were unsure if such move would have a net benefit at all, a few members argued that this could be even counterproductive.

Many members said the ECB should follow the example of the Federal Reserve Bank and give an explicit forward guidance to signal the markets that the interest rates would stay low for an extended period of time. This could be an incentive for banks to move money currently invested into sovereign debt into their lending business, they argued.

The discussion showed that most members still favour unconventional measures. A rate cut alone would not have sufficient impact on bank credit and the economy, they said.

Several members agreed that providing further monetary stimulus could aggravate moral hazard risks and could lead to asset bubbles especially in the core countries. They argued that this was tolerable given the political and social consequences that inaction could have. One member even pointed out that the fiscal authorities could use taxation to avoid such bubbles from developing.


Members’ individual votes:



Rate recommendation

José AlzolaThe Observatory Groupunchanged
Marco AnnunziataGeneral Electriccut 0.25%
Manuel BalmasedaCEMEXcut 0.25%
Elga BartschMorgan Stanleycut 0.25%
Andrew BosomworthPimcocut 0.25%
Sylvain BroyerNatixiscut 0.25%
Jacques CaillouxNomuracut 0.25%
Julian CallowBarclays Capitalcut 0,25%
Eric ChaneyAxacut 0.25%
Janet HenryHSBCcut 0.25%
Merijn KnibbeWageningen Universitycut 0.25%
Jörg KrämerCommerzbankhike 0,25
Erik NielsenUnicreditcut 0.25%
Jean-Michel SixStandard & Poor'scut 0,25%
Richard WernerUniversity Southamptonunchanged


New York, 29 May, 2013

Rolf Benders

Non-voting Chair of the Shadow ECB Council

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 monthly basis (though in November it holds a physical meeting). Its discussions take place a week before the monthly official ECB Governing Council "policy" meetings, and 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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