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Shadow ECB Council Council Sees Changes to Forward Guidance

The ECB Shadow Council expects no real change to monetary policy in June but does say it’s time to change the central bank’s forward guidance. Growth and inflation risks are no longer to the downside.

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The Shadow Council members see no need for the ECB to change its course to react to the situation in Italy. Quelle: dpa

Berlin/Frankfurt The ECB Shadow Council expects no real change to monetary policy in June but does say it’s time to change the central bank’s forward guidance. Growth and inflation risks are no longer to the downside.

Growth Forecasts Revised Upwards, Inflation Downwards

Compared to three months ago, members lowered their inflation forecast slightly from an average of 1.7 percent to 1.6 percent this year and also down 0.1 percentage point to 1.4 percent for 2018. Both are slightly below the ECB’s staff projections from March

The Shadow Council’s mean forecast for GDP growth on the other hand was revised upwards from 1.6 percent to 1.8 percent for this year, in line with the ECB staff projections from March. The forecast for 2017 was also raised slightly from 1.5 percent to 1.6 percent.

Shadow Council macroeconomic forecasts

(ECB’s March projections in brackets)
20171.6 (1.7)1.8 (1.8)
20181.4 (1.6)1.6 (1.7)
Contributors: M. Annunziata; E. Bartsch; A. Bosomworth; S. Broyer; W. Buiter; J. Callow; J. Henry, J. Krämer, W. Buiter.

Adjust the Growth/Deflation Risks

Most members agreed that growth risks have become more balanced and were no longer tilted to the downside. While inflation remains below the ECB’s target, most members also agreed there was no longer a risk of deflation (some members questioned where there ever had been). The ECB should adjust its opening statement to reflect that new reality, most members agreed. Yet many members said they believe low inflation in the euro zone remains a problem that must be addressed. Some noted the lack of strong wage growth, which had surprised to the downside and must be taken into account. One member noted the lack of deflation risks by itself means the ECB’s quantitative easing policy should be halted immediately.

Remove Easing Bias in Forward Guidance

A number of members suggested June could already be the time for some careful adjustments to the ECB’s forward guidance to move away from the central bank’s bias toward further easing. The ECB should eliminate its reference to the possibility of lower rates in future and instead reflect a more balanced outlook on the path of rates going forward. Not all agreed, however, with one member arguing there was “no reason” to remove the easing bias as early as June.

Members also broadly agreed the ECB should tweak its forward guidance when it comes to the sequencing of tapering. While all agreed the ECB should end its asset purchasing program before raising interest rates, most members said the central bank should remove its reference to interest rates being raised “well past” the end of APP to provide additional flexibility. In the words of one member, this was an “unnecessary time commitment” and the “well” reference should be removed from the statement.

Initial Signal on APP in September

Two members called for APP tapering to be implemented immediately, arguing the risks of deflation no longer existed and risks to financial stability outweighed the benefits of additional QE, and one member called for an immediate increase in the deposit rate to zero. A number of other members agreed the ECB’s policy may be excessively loose, and that financial-stability risks are growing (though few expressed fears of emerging asset-price bubbles), but said the ECB should continue its APP as advertised until the end of the year to avoid unnecessary market volatility. Still others believed the monetary stance remains appropriate. One member advocated shifting away from QE to the monetization of a sizeable fiscal stimulus focused on euro members with large output gaps as the only viable solution.

In nearly all cases, members believed some form of signal regarding its monthly asset purchasing program must come in September or (in the case of one member) October at the latest. Nearly all Shadow Council members agreed the ECB should signal its intention to start reducing the APP in 2018, though members differed on the pace and style of the announcement.

Tapering or Recalibration?

Some members called for a classic tapering that would see the APP program brought to a close at the end of the second quarter. Many members called for a more open-ended “recalibration,” announcing an additional reduction to €30 or €40 billion a month in the first quarter and leaving the rest of the year open-ended. While these members too believed a reduction to zero by the end of the second quarter is likely, such a recalibration would give the ECB greater flexibility/optionality to adjust the pace of the exit as it sees fit over time – or even increase the pace again should this be warranted by euro-zone economic data.

MemberAffiliationFixed rate        Deposit rate
José AlzolaThe Observatory GroupUnchanged       Unchanged    
Marco AnnunziataGeneral ElectricUnchangedUnchanged        
Elga BartschMorgan StanleyUnchangedUnchanged    
Andrew BosomworthPimcoUnchangedUnchanged       
Sylvain BroyerNatixisUnchangedUnchanged                  
Willem BuiterCitigroupUnchangedUnchanged                 
Jacques CaillouxRokos CapitalUnchanged   Unchanged                   
Julian CallowElement CapitalUnchangedUnchanged      
Janet HenryHSBCUnchangedUnchanged             
Merijn KnibbeWageningen UniversityUnchangedUnchanged      
Fabian LindnerIMK UnchangedUnchanged 
Jörg KrämerCommerzbank +0.25+0.25
Thomas MayerFlossbach von Storch
Lucrezia ReichlinLondon Busines School UnchangedUnchanged 
Richard WernerUniversity Southampton +0.5                   +0.5                   

Frankfurt, 5th June, 2017
Jan Mallien and Christopher Cermak

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 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.

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