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Shadow ECB Council urges ECB to specify forward guidance

Members of the ECB Shadow Council expect an on-going recession, and a very large majority favoured again a cut of the Main Refinancing Rate near zero.  

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At the meeting of the Shadow ECB Council on 25 July, 2013, a large majority of 12 members again recommended a cut of the ECB’s main refinancing rate by a quarter percentage point to 0.25 per cent, after the ECB had last lowered it to 0.5 per cent in May.

Most members also recommended that the ECB clarifies what it means by forward guidance, with many of the view that this should be tied to an economic indicator.

Members on average expect a decline of GDP of 0.6 per cent, unchanged from last month and in line with the latest ECB projections. For 2014 they expect on average an unchanged growth rate of 0.8 per cent, which is below ECB projections. Inflations forecasts remained unchanged at 1.5 per cent, this year and next, which is slightly higher than ECB projections.


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



20131.5  (1.5)-0.6  (-0.6)
20141.5  (1.5)0.8 (0,8)
Contributors: M. Annunziata, M. Balmaseda; E. Bartsch; S. Broyer; J. Cailloux; J. Callow; E. Chaney, M. Diron, J. Krämer, E. Nielsen, J.-M. Six


Rates near zero 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 not to reverse any time soon, a credit crunch and an expected second year of shrinking euro area GDP, a very large majority (12 out of 15) favoured again a cut of the Main Refinancing Rate, which the ECB last lowered to 0.5 per cent in May 2013.

 Two members said rates should be left unchanged, another member argued in favour of a rate hike by 0.25 percentage points on the grounds that a prolonged period of abnormally low rates was distorting economic incentives.

Forward guidance welcomed – But many members want more specifics

Many participants welcomed the newly introduced forward guidance of the ECB Council as a step in the right direction which would give markets a better understanding of the interest rate path in the Euro Zone. A number of members thought that the ECB should provide markets with more specifics about how the forward guidance is meant. Many expressed the opinion that the forward guidance should be tied to an economic indicator. The idea of following the concept of the Federal Reserve Bank of the US, which ties the guidance to the unemployment rate, was dismissed by most participants on the grounds that the labour market in the Euro Zone is not homogenous enough.

A number of members argued an indicator derived from either the money supply or the credit supply could be used to specify the forward guidance. A small number favoured a new LTRO at a fixed rate to signal to the markets what extended period should mean. Members expressed the expectation that “extended period” in the context of the monetary policy of the ECB means at least 12 to 24 months.

 Members’ individual votes:



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José AlzolaThe Observatory Groupunchanged
Marco AnnunziataGeneral Electric 
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 KnibbeUniversity of Groningencut 0.25%
Jörg KrämerCommerzbankhike 0,25%
Erik NielsenUnicreditcut 0.25%
Jean-Michel SixStandard & Poor'scut 0.25%
Richard WernerUniversity Southamptonunchanged

Frankfurt, 29 July, 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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