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Shadow ECB Council urges ECB to take bold action

At the meeting of the Shadow ECB Council on 1 December 2011 a large majority recommended an immediate cut of the ECB’s main refinancing rate of half a percentage point or more. Three members argued in favor of a smaller cut, one recommended leaving rates unchanged at 1.25 %.      

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Forecasters expect a stagnant economy

Members continued to lower their forecasts for euro area real GDP in 2012. The average forecast declined to 01 % from 0.6 % a month ago. This 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. Half the forecasters projected a negative growth rate. 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)




20112.6 (2.6)1.6  (1.7)
20121.7 (1.7)0.1 (0.6)


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

Assumptions: Most forecaster assumed that the ECB will cut its key policy rate to 0.75 % within the next three months.


In Favour of a Large Rate Cut

Where was near unanimity on the Shadow Council that the ECB Governing Council should lower interest rates further. One member advocated a cut of a full percentage point to 0.25 % for the refinancing rate, three a cut of 0.75 %, eleven a cut of 0.5 % and three of 0.25 %. Only one member recommended an unchanged policy rate.


Members who advocated a large rate cut stressed the high likelihood that the economy would go into recession and the possibility that a deep recession, comparable to the one of 2009 would materialize. Furthermore, most members diagnosed an ongoing or emerging credit crunch and judged the state of the banking system as very precarious. They felt that a significant rate cut would contribute to alleviating these problems and that it would also contribute to keeping the level of bond yields down, in Germany as well as in other countries.


Those argueing for a cut of more than half a percentage point argued that a strong signal of resolve from the central bank was required to inspire confidence and that several smaller steps would be less effective in this respect.

Of the three members who advocated a small rate cut, one member argued that interest rates were not the main issue currently; another expressed a bias toward a further rate cut in the ensuing months.

The member who opposed a rate cut said that lower interest rates would do nothing to solve the current crisis and stressed that it had been excessively low interest rates which had caused the crisis.


Support for Attaching Strong Conditionality to Bond Purchases

There was an intensive discussion about the dangers or merits of the ECB committing to unlimited purchases of government bonds once a certain yield level had been reached. Many members warned that such a move or any significant extension of bond purchases would take away the pressure and incentive for governments of crisis countries to reform and to consolidate public finances. Others countered that such mistrust was not warranted, as these governments were taking almost unprecedented steps to reign in budget deficits.

A move for the Shadow Council to explicitly support the restrictive stance of Bundesbank representatives and others vis-à-vis bond purchases, demanding a commitment to rewrite the rules of financial coordination between governments before any significant extension, found a narrow majority on the Shadow Council.

Those opposed to such a resolution argued that the euro area was in imminent danger of breaking up and that therefore, this was no time for insisting on first principles. They stressed that nations with their own central bank willing to buy government bonds if needed, including the UK and the US, did not face a government funding crisis, even if government finances were in worse state than in some affected euro area countries. They also considered it not in the remit of the ECB to impose fiscal policy measures on elected governments. However, for the majority, the risks of a central bank committing to indirectly finance government deficits weighed more heavily.


In Favor of Lengthening LTROs and Loosening Collateral Requirements  

To ease severe funding strains of banks, many members advocated a broadening of the list of acceptable collateral for refinancing with the ECB, including accepting foreign currency collateral issued by non-euro-area issuers. Several members also recommended that the ECB should offer refinancing operations of longer maturities than the current maximum length of 13 months. Some advocated a maximum of two year, others of three years. There was very little opposition to these suggestions on the Shadow Council, but no formal vote was taken.


Members’ individual votes:

MemberAffiliationRate recommendationBias
José AlzolaThe Observatory Groupcut 0.5% 
Marco AnnunziataGeneral Electriccut 0.25% 
Manuel BalmasedaCEMEXcut 0.5% 
Elga BartschMorgan Stanleycut 0.5% 
Andrew BosomworthPimcocut 0.5% 
Jacques CaillouxRBScut 1.0 % 
Julian CallowBarclays Capitalcut 0.75% 
Eric ChaneyAxacut 0.5% 
Marie DironOxford Economicscut 0.5% 
Janet HenryHSBCcut 0.5% 
Gustav HornIMK, Düsseldorfcut 0.25% 
Jörg KrämerCommerzbank unchanged 
Erik NielsenUnicreditcut 0.25% 
Jean-Michel SixStandard & Poor's cut 0.5% 
Angel UbideTudor cut 0.5% 


Frankfurt,   2 December 2011

Norbert Häring

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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