The ECB Shadow Council backs a reduction in the central bank's asset-purchasing program from the start of 2018, but says an announcement can wait until October's meeting. In the meantime, the ECB should look through the rising euro.
Growth Forecasts Revised Upward
Compared to three months ago, members lowered their inflation forecast slightly from an average of 1.6 percent to 1.5 percent this year, in line with the ECB's staff projections from June. Members kept forecasts unchanged at 1.4 percent for 2018 and predicted inflation at 1.5 percent for 2019.
The Shadow Council’s mean forecast for GDP growth on the other hand was revised upwards from 1.8 percent to 2.1 percent for this year, above the ECB staff projections of 1.9 percent from June. The forecast for 2018 was raised significantly to 1.9 percent from 1.6 percent, with growth seen at 1.7 percent for 2019.
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Shadow Council macroeconomic forecasts(ECB’s June projections in brackets)
|2017||1.5 (1.7)||2.1 (1.9)|
|2018||1.4 (1.6)||1.9 (1.8)|
|2019||1.5 (1.6)||1.7 (1.7)|
|Contributors: M. Annunziata; E. Bartsch; A. Bosomworth; S. Broyer; W. Buiter; J. Callow, J. Krämer, W. Buiter.|
Wait Until October
While two members of the shadow council called for a tapering of the Asset-Purchasing Program to begin immediately, most members argued the ECB's credibility and forward guidance dictates that the APP program should remain in place at its current level until the end of the year, to avoid additional market volatility. Given that, a number of members noted there was no rush for the ECB to clarify its 2018 intentions at the September governing council meeting. October would be more appropriate for an initial announcement, while the details could even be left until December. Most members agreed that December would be too late for an initial announcement of 2018 plans.
A few members noted that waiting until October would have the added benefit of allowing the ECB to gather more information on the development of the euro zone economy and the path of the euro, as well as to account for rate decisions by the US Federal Reserve and international political developments.
APP Winddown in 2018
While interest rates should remain unchanged, most Shadow Council members urged the ECB to reduce its asset-purchasing program in January 2018 by cutting the monthly purchasing volume to €30-40 billion, with some noting that financial risks have increased and the benefits of an aggressive APP program have dwindled as euro zone growth lies above potential. Most members however rejected a strict tapering approach that would require the ECB pre-commit to wind down APP by fixed amounts over a prescribed period of time. A few members called for a fully flexible approach, with the monthly purchase volume reevaluated in quaterly intervals. One member proposed a compromise that might see the ECB communicate its intentions to taper over the course of 2018 but review the pace in quarterly intervals - even if the exact pace and timing would not be laid out in advance.
Look Through the Euro
Shadow Council members broadly agreed the ECB could afford to look through the recent appreciation of the euro currency against the dollar, rather than adjust policy in light of that appreciation. One member however suggested council members could use communication via speeches to keep the euro from appreciating further. Another member suggested waiting on any APP winddown announcement until October, after the Federal Reserve's next meeting, would at least prevent the ECB from influencing the euro's path through its own policy adjustments.
Time for Greater Transparency
A few Shadow Council members called on the ECB to improve transparency in spelling out its APP purchases, particularly as some form of tapering begins. One member called for the ECB to bring its transparency policies in line with that of other central banks by publishing the quantities of bonds acquired by the Eurosystem at the security level, allowing markets to calibrate expectations for monetary policy and reduce volatility. One member said the ECB's reinvestment policy should also be clarified, so that changes in flows and stock can be fully assessed by markets. This would help avoiding overreaction on long term yields as tapering gets underway. One member also refered to recent comments from Bundesbank and the German financial regulator Bafin that there would be too many small banks in Germany which he strongly rejected. Accoording to him small banks make the financial system more stable.
Members’ individual votes on main refinancing rate (currently 0.0%):
|Member||Affiliation||Fixed rate||Deposit rate|
|José Alzola||The Observatory Group||Unchanged||Unchanged|
|Marco Annunziata||General Electric||Unchanged||Unchanged|
|Elga Bartsch||Morgan Stanley||Unchanged||Unchanged|
|Jacques Cailloux||Rokos Capital||Unchanged||Unchanged|
|Julian Callow||Element Capital||Unchanged||Unchanged|
|Merijn Knibbe||Wageningen University||Unchanged||Unchanged|
|Thomas Mayer||Flossbach von Storch|
|Lucrezia Reichlin||London Busines School||Unchanged||Unchanged|
|Richard Werner||University Southampton||+0.5||+0.5|
Frankfurt, 4th September, 2017
Jan Mallien, Christopher Cermak and Jeremy Gray
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.