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Shadow ECB Council Urges ECB to Cut Rates

At the meeting of the Shadow ECB Council on 27 October 2011, a four-fifths majority recommended an immediate cut of the ECB’s main refinancing rate. Three members argued in favor of unchanged rates, five in favor of a 0.25 percentage point cut (down two from the month before) and seven in favor of a 0.5 percentage point cut (up two).   

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Growth forecasts go down further

After strong downward revisions in the preceding months, members continued to lower their forecast for euro area real GDP in 2012. The average forecast declined one further notch to 0.6%, which compares to the ECB staff’s September  projection of 1.3% and the Shadow ECB Council’s own projection of 1.6% back in July. Meanwhile, in the view of the Shadow Council, euro area HICP inflation is expected to decline to 1.7% in 2012, down from 2.6% this year.

Shadow Council macroeconomic forecasts

(Forecast means in %, previous forecasts in brackets)

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Standort erkennen
    20112.6 (2.6)1.6  (1.7)
    20121.7 (1.8)0.7 (1.1)

    Contributors: M. Annunziata, M. Balmaseda; E. Bartsch; J. Cailloux; J. Callow; E. Chaney, M. Diron, J. Henry, G. Horn; J. Krämer, J.-M. Six

    Assumptions: Most forecaster assumed that the ECB will cut its key policy rate to 1.25% within three months and to 1% within six months.

    Overall positive assessment of summit decisions

    All but one member who took part in the discussion delivered an overall positive assessment of the decisions taken by the heads of state at the EU summit on 26 October. They judged that the risk of a financial meltdown in the euro area had been significantly reduced by the proposed haircut on Greek government debt papers and measures proposed to prevent a wave of bank failures.

    There was widespread scepticisms, however, if the leveraging of the EFSF would succeed as expected. Members were sceptical in particular that enough private money and money from outside the Euro area could be attracted to leverage the financial firepower of the EFSF to more than a trillion euro. It was also remarked that the creation of a Special Purpose Investment Vehicle created opacity and was unfortunate, as such vehicles had had a large part in causing the financial crisis starting in 2007/2008.

    Higher capital requirement for banks increases the risk of a deep recession

    The risk of a relapse of the euro areas economy into recession had been considered rather high by many members already before the conclusions of the Brussels EU summit on 26 October. Several members warned that the decision to require banks to raise their capital ratio by mid-2012 was likely to trigger a credit squeeze on households and companies as banks would try to raise their capital ratio by lowering their risky assets. Therefore, they considered it imperative that the ECB counterbalance this effect by immediately lowering rates and by increasing the supply of central bank money. This view was widely shared, even though some members cautioned that the summit decisions also included additional support for banks that would help them to meet their funding requirements associated with providing loans.

    Those not in favour of an immediate rate cut judged that interest rates were very low already and that the ECB’s focus should be on measures to improve the functioning of financial markets.

    Inflation risks were not considered an impediment to rate cuts by most council members, as they projected that the inflation rate would start declining soon and move safely below 2% in 2012 and 2013.

    ECB needs to step up support  

    There was a strong consensus on the Shadow Council that the ECB’s involvement in the market for government securities will continue to be needed, as the EFSF has only limited financial means. Therefore, all members agreed that the ECB should keep its Securities Market Program active, to signal that it is still ready to act as needed. Several members argued, the ECB should step up its purchases of securities in order to push more central bank money into the system.

    Members’ individual votes:



    Rate recommendation


    José AlzolaThe Observatory Groupcut 0.25% 
    Marco AnnunziataGeneral Electricunchangeddown
    Manuel BalmasedaCEMEXunchangeddown
    Elga BartschMorgan Stanleycut 0.25% 
    Andrew BosomworthPimcocut 0.25% 
    Jacques CaillouxRBScut 0.5% 
    Julian CallowBarclays Capitalcut 0.5% 
    Eric ChaneyAxacut 0.5% 
    Marie DironOxford Economicscut 0.5% 
    Janet HenryHSBCcut 0.5% 
    Gustav HornIMK, Düsseldorfcut 0.5% 
    Jörg KrämerCommerzbank unchanged 
    Erik NielsenUnicreditcut 0.25% 
    Jean-Michel SixStandard & Poor's cut 0.25% 
    Angel UbideTudor cut 0.5% 

     Frankfurt,   28 October 2011

    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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