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Shadow ECB Council Most members support further monetary easing

Shadow Council members were in favor of more monetary easing, though many expressed concerns about the ECB’s impact and a narrow majority voted against a further cut in the deposit rate.

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ECB's headquarters in Frankfurt. Quelle: dpa

Frankfurt Shadow Council members were in favor of more monetary easing, though many expressed concerns about the ECB’s impact and a narrow majority voted against a further cut in the deposit rate. The vote was split 7-6 against pushing the deposit rate further into negative territory.

A large majority supported an extension of the current bond purchases, either by expanding the monthly volume or time period. The average forecasts for inflation have been revised down strongly to 0.3 percent for 2016 and to 1.1 percent for 2017.

Inflation forecast 2017 below ECB projections

Compared to three months ago, the average forecast for inflation this year has been revised sharply downwards from 1.1 percent to 0.3 percent. This is far below the ECB’s staff projection from December of 1.0 percent.  For 2017 the forecast remained at 1.1 percent which is also well below the ECB’s projection of 1.6 percent.

The Shadow Council’s mean forecast for GDP growth for 2016 has been revised down from 1.6 percent to 1.4 percent and for 2017 from 1.6 percent to 1.5 percent.

Shadow Council macroeconomic forecasts

(ECB’s December projections in brackets)
20160.3 (1.0)1.4 (1.7)
20171.1 (1.6)1.5 (1.9)
Contributors: M. Annunziata; A. Bosomworth; J. Callow; J. Henry, J. Krämer; W. Buiter.

More easing, despite concerns over efficacy

A majority of Shadow Council members favored some form of additional easing, despite concerns that the ECB’s monetary policy has been losing efficiency. The council was split on the best tools to ease further.

With inflation still well below target, many of those in favor of more aggressive action argued it was primarily a matter of credibility. Unless the ECB’s price-stability mandate is changed, the central bank must do everything in its power to push inflation closer to target.

In that vein, the March meeting was a critical one to get the communication right and to be aggressive in order to shock inflation expectations higher.

One member argued the global economy has played a key role in undermining the ECB’s efforts, suggesting the strategy remains the right one but will need more time to show results.

Should the ECB continue to be ineffective, two members of the council suggested the time was nearing for a global currency accord to avoid further competitive devaluations by the world’s central banks. Two other members suggested pushing for additional fiscal stimulus, either from the European Union or the G20.

Those in favor of less easing argued the ECB’s policies were beginning to undermine rather than benefit the financial sector and the economy. Two members argued that interest rate increases could therefore actually boost economic output by increasing earnings prospects.

Should the ECB’s efforts remain ineffective, one member argued the ECB will have no choice but to reverse course and follow the Austrian school of “doing nothing,” allowing non-performing loans to fail rather than risking a monetization of debt that could lead to hyper-inflation.

Negative Interest Rates Vs Financial Stability

A narrow 7-6 majority of shadow council members opposed the ECB lowering its deposit rate further into negative territory. Most of those in the ‘no’ column argued that, by undermining bank profitability, the risks to financial stability had begun to outweigh the benefits of another rate cut for the euro zone economy. A few members argued negative rates had even turned counterproductive, weighing on growth over the longer term by encouraging banks and companies to take decisions that would lower their earnings or productivity in the long term.

Those in favor of negative deposit rate cuts argued the positive effects should be given more time to be felt. Most of those in favor however called for a tiered system similar to the Bank of Japan as a means of limiting the impact on the profitability of banks. One member noted that banks around the world have been suffering from profitability concerns.

One member argued that, despite the risks to banks, a negative deposit rate cut was necessary because markets had come to expect it. Signaling at the March meeting was key to raising inflation expectations.

On the other end, two members of the shadow council called for increasing interest rates, which they argued could actually improve economic prospects by supporting productive lending to businesses by banks. 

More support for QE

By contrast to negative rates, a majority of members supported increasing the ECB’s monthly purchases, though members were divided about the pace. Recommendations ranged from €5 billion to €30 billion additional QE per month, with some also arguing the time line should be extended another six months.

Those in support of a strong QE boost argued 2016 will be critical for restoring the euro zone economy on a path towards inflation – better more QE now than in 2017. Those favoring a smaller QE increase suggested it was necessary for signaling but was unlikely to have a major effect.

A number of those in favor of more QE also called for expanding eligible assets to corporate bonds. One member suggested equities as well.

Extend LTROs

Most shadow council members spoke out in favor of additional LTROs or even permanent LTROs, without conditions, in order to keep liquidity flowing to European banks that required it. A few members argued for new LTROs with longer maturities and at negative rates.

No helicopter money

The vast majority of shadow council members opposed the use of ‘helicopter money’ to drive up inflation or boost euro zone spending. A number of members argued history has shown that hyper-inflation can develop quickly and unexpectedly if any form of monetizing debt is implemented.

Three members didn’t close the door entirely, with one member suggesting helicopter money could become necessary in an extreme deflationary environment. Two members supported injecting money into the economy immediately, advocating either tradeable vouchers of 1000,- for every euro area citizen which can be used to paying down mortgages or a coordinated approach with the G20 and amounting to about 1.5 percent of euro zone GDP for two years. The ECB would best use the funds to buy EU bonds on a large scale to fund infrastructure projects and other social expenditures.

Keep bank notes in circulation

None of the shadow council members supported moves to remove banknotes from circulation in the euro zone, though there was a divide over whether the €500 note should be withdrawn. Some members argued it was necessary to curb criminality, but others worried it would send the wrong signal to consumers and the economy at a time of heightened concern over negative interest rates.


Members’ individual votes on main refinancing rate (currently 0.05%):

MemberAffiliationFixed rate            Deposit rate    QE
José AlzolaThe Observatory GroupUnchanged       Unchanged     + 15 Bill. 
Marco AnnunziataGeneral ElectricUnchangedUnchanged          + 
Elga BartschMorgan StanleyUnchangedUnchanged          + 
Andrew BosomworthPimcoUnchangedUnchanged        + 5-10 Bill.  
Sylvain BroyerNatixisUnchanged-0.1                      + 
Willem BuiterCitigroup -0.2-0.2                  +25 Bill.   
Jacques CaillouxRokos Capital -0.2-0.2                  +10-20 Bill. 
Julian CallowElement CapitalUnchanged-0.1                  +30 Bill. 
Eric ChaneyAxaUnchanged-0.2                  
Janet HenryHSBCUnchanged-0.1                   +20 Bill. 
Merijn KnibbeWageningen UniversityUnchangedUnchanged       unchanged 
Fabian LindnerIMK   
Jörg KrämerCommerzbank +0.25+0.25 
Eric NielsenUnicredit   
Richard WernerUniversity Southampton +0.5                   +0,2                    - 60 Bill. 


Frankfurt, 4th March, 2015

Jan Mallien, 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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