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Statement of the ECB Shadow Council, adopted October 31

The ECB Shadow Council recommends with a majority of 15 votes that the ECB Governing Council leave rates unchanged at its next meeting and advises against expressing an inclination toward higher rates. The Shadow Council judges that, since the last meeting a month ago, the downside risks to economic activity have increased more than the upside risks to inflation.

Prospects for growth and inflation

The prevailing view at the ECB Shadow Council is that downside risks to economic activity have increased more since last month than the upside risks to inflation. A continuation of the declines in business and consumer sentiment indicators, higher oil prices, a higher euro exchange rate, and signs of a deepening slump in the US real estate market are all indicators of increased downside risks to growth. The ECB Shadow Council also notes that the situation in European money markets has improved only slightly. Three-month Euribor interbank rates trade at around 4.60%, still almost 40 basis points above their pre-crisis level. The loan manager survey of the ECB showed a tightening of credit standards, which is likely to continue and dampen the economy to some extent.

On the other hand the Shadow Council notes that any decline in economic dynamics would take place from a fairly elevated level of production, orders and business sentiment. Furthermore, many important emerging markets and oil exporting countries seem likely to keep growing strongly, thus providing an ongoing source of export demand.

Despite an increase of the annual euro area HICP inflation rate to 2.6 percent in October, the Shadow Council’s prevailing assessment of the outlook for inflation did not change much since a month earlier. A stronger euro and the expected deceleration of growth combined with moderate wage increases are expected to contribute to reduced inflationary pressures going forward. Still, the HICP inflation rate is expected to remain elevated at or above 2 ½ percent into the first months of 2008.

Shadow Council members’ forecasts for growth have become a little less optimistic since last month, while inflation forecasts have remained unchanged on average. Three members lowered their growth forecast for 2008, one did so for 2007. One member slightly raised their inflation forecast for 2008. On average, Shadow Council members now expect growth to slow down to 2.6 percent this year (unchanged) and to 1.9 percent in 2008 (down from 2.0 percent). Inflation is forecast at 2.0 percent this year and next (unchanged). However, uncertainty regarding the outlook for growth and inflation is still judged unusually high. Based on current information most members judge that the risk of a stronger than expected slowdown of the economy dominates the risk of a significant acceleration of inflation to an even greater extent than a month ago.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)
Year	HICP-Inflation in %	GDP-Growth in %
2006	2.2	2.8
2007	2.0 (2.0)	2.6 (2.6)
2008	2.0 (2.0)	1.9 (2.0)

Monetary policy stance

The ECB’s key rate of 4.0 percent is judged appropriate as long as there are no clear indications that the downside risks to growth do materialize to a significant extent - otherwise, a rate cut might be called for. However, in view of the elevated current inflation rate the Shadow Council sees limited room for the ECB to cut rates pre-emptively, without being reasonably sure that the downside risks to activity will indeed materialise. The Shadow Council does not deem it advisable for the ECB to express an inclination to raise its key interest rate further.

Other views

A sizeable minority disagreed with the view that growth risks had increased more than inflation risks and held that both had increased at more or less the same pace. Some members of this group stressed the primary mandate of the ECB to safeguard price stability, implying that risks to growth and to price stability should not be considered to be of equal importance.

Members who voted for a recommendation of a rate cut stressed the accumulation of downside risks to the economy and voiced doubt that demand from emerging markets could buffer the euro area economy against a decline in export demand elsewhere. They reasoned that emerging market economies would not remained unaffected of a US slowdown and that the share of Eurozone exports going to countries like China and Russia was still relatively small.

Some members would like the ECB to do more to ease tensions in the money market’s medium term segment, by increasing the size and frequency of three-month tender operations.

One holds that a rate hike will be necessary if money and credit growth should not slow down significantly and swiftly, arguing that excessive money and credit growth might destabilize financial markets and/or stoke inflation.

Vote

15 members voted for the recommendation to leave rates unchanged at the next ECB meeting November 8. Four members voted in favour of a rate cut by 25 basis points.

INDIVIDUAL VOTES (Recommended rate change in percentage points)
Member*	Affiliation	Vote
Thorsten Polleit	ECB-Observer, Frankfurt	no change
Joachim Fels	Morgan Stanley, London	cut 25 bp
Willem Buiter	London School of Economics and Goldman Sachs	no change
Thomas Mayer	Deutsche Bank, London	no change
Daniel Gros	Center of European Policy Studies (CEPS), Brussels	no change
Stephen King	HSBC, London	no change
Giancarlo Corsetti	European University Institute, Florence	no change
Luigi Buttiglione	Fortress, London	no change
Jacques Cailloux	Royal Bank of Scotland, London	no change
Josè Alzola	Citigroup, London	no change
Jean-Michel Six	Standard & Poor's, London	no change
José Luis Escrivá	BBVA, Madrid	no change
Véronique Riches-Flores	Société Générale, Paris	cut 25 bp
Michael Heise	Dresdner Bank / Allianz, Frankfurt	no change
Gernot Nerb	Ifo-Institute, Munich	no change
Julian Callow	Barclays Capital, London	no change
Agnès Bénassy-Quéré	CEPII, Paris	cut 25 bp
Charles Wyplosz	Graduate Institute of International Studies, Geneva	no change
Angel Ubide	Tudor Investment Corporation, Washington D.C.	cut 25 bp

Friday, November 2, 2007
Norbert Haering, Frankfurt Statement of the ECB Shadow Council, adopted September 27, 2007

The ECB Shadow Council recommends that the ECB leave its key interest rate on hold at the next policy meeting on October 4. No bias in favor of higher rates should be expressed at the ECB press conference. Many members of the Shadow Council see a high probabiltiy that a rate cut might be needed soon.

Prospects for growth and inflation

The Shadow Council notes that more than a month after the credit bubble burst the situation in European money markets has not improved. Three-month Euribor interbank rates trade at around 4.75%, some 50 basis points above their pre-crisis level. In normal times, this would be consistent with an official refinancing rate of 4.5 percent, rather than the current 4.0 percent. The increase in money market interest rates, higher risk spreads and the appreciation of the euro have led to less favourable financing conditions and reduced price competitiveness of Euro area producers. Declines in business and consumer surveys suggest that the credit crunch of the financial sector is beginning to affect the economy.

On the other hand it is noted that any decline in economic dynamics would take place from a fairly elevated level of production, orders and business sentiment. Furthermore, many important emergent markets and oil exporting countries seem likely to keep growing strongly, thus providing an ongoing source of export demand.

As regards inflation, the stronger Euro and the expected deceleration of growth are likely to reduce price pressures going forward. The headline inflation rate is expected to rise above two percent in the coming months, but with underlying measures and wages well under control it is expected to go back down to slightly below two percent in the course of 2008. Inflation expectations seem well anchored.

On average, Shadow Council members expect growth to slow down to 2.6 percent this year and to 2.0 percent in 2008. Inflation is forecast at 2.0 percent this year and next. However, uncertainty regarding the outlook for growth and inflation is currently unusually high. Based on current information most members judge that the risk of an excessive slowdown of the economy clearly dominates the risk of a significant acceleration of inflation.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)
Year	HICP-Inflation in %	GDP-Growth in %
2006	2.2	2.8
2007	2.0 (2.0)	2.6 (2.6)
2008	2.0 (1.9)	2.0 (2.1)

Monetary policy stance

The ECB’s key rate of 4.0 percent is judged appropriate as long as there are no indications that the downside risks to growth will materialize to a significant extent. Otherwise a rate cut might soon be called for in the opinion of a large number of members. There is a strong consensus in the Shadow Council that it is not advisable for the ECB to express an inclination to raise its key interest rate further.

Money market operations

The ECB Shadow Council broadly supports the approach of the ECB with regard to alleviating the tensions in the money market. The ECB is encouraged to continue to provide a generous amount of liquidity to the market, including for term (three month) financing. The Shadow Council notes that the persistence of elevated Libor rates is a sign that the lending behaviour of banks has fundamentally shifted and that the money market is not functioning in a normal, liquid fashion. Therefore, a stiff penalty rate for the provision of additional liquidity is not called for in the opinion of most members of the Shadow Council.

. Other views

Thorsten Polleit and Julian Callow disagree with the statement that the risks to growth clearly outweigh the risk of an acceleration of inflation. Polleit cites the rising gold price as potential evidence that inflation expectations might be on the rise. Callow stresses the mitigating effect of strong global demand on downside risks to growth and the upside risks to inflation stemming from high commodity prices.

Joachim Fels judges that monetary policy has already turned restrictive, with three-month Euribor rates standing some 75 basis points above his estimate of the neutral, or natural, rate of four percent. .He expects that higher short rates, tighter bank lending standards, a stronger euro and a slowing US consumer are likely to push euro area GDP growth below its trend pace in the coming quarters. He also recommends that the ECB lean against the wind of the euro appreciation. Therefore he voted for a recommendation to cut the key rate by 25 basis points. Véronique Riches-Flores agrees with his more pessimistic view of economic perspectives and shares his preference for a rate cut.

Willem Buiter disagrees with the majority view that the ECB should provide extra liquidity to the money market without imposing a penalty rate. He would charge more than the 100 basis points premium of the Marginal Lending Facility over the policy rate if the borrower is offering highly illiquid collateral.

Vote

17 members voted for the recommendation to the ECB to leave rates unchanged at its next meeting on October 4. Two members voted in favour of a rate cut by 25 basis points.

INDIVIDUAL VOTES (Recommended rate change in percentage points)
Member*	Affiliation	Vote
Majority Recommendation		no change
Thorsten Polleit	ECB-Observer, Frankfurt	no change
Joachim Fels	Morgan Stanley, London	cut 25 bp
Willem Buiter	London School of Economics and Goldman Sachs	no change
Thomas Mayer	Deutsche Bank, London	no change
Daniel Gros	Center of European Policy Studies (CEPS), Brussels	no change
Giancarlo Corsetti	European University Institute, Florence	no change
Stephen King	HSBC, London	no change
Luigi Buttiglione	Fortress, London	no change
Véronique Riches-Flores	Société Générale, Paris	cut 25 bp
Jacques Cailloux	Royal Bank of Scotland, London	no change
Josè Alzola	Citigroup, London	no change
Jean-Michel Six	Standard & Poor's, London	no change
José Luis Escrivá	BBVA, Madrid	no change
Michael Heise	Dresdner Bank / Allianz, Frankfurt	no change
Gernot Nerb	Ifo-Institute, Munich	no change
Agnès Bénassy-Quéré	CEPII, Paris	no change
Julian Callow	Barclays Capital, London	no change
Charles Wyplosz	Graduate Institute of International Studies, Geneva	no change
Angel Ubide	Tudor Investment Corporation, Washington D.C.	no change

thursday, September 27, 2007
Norbert Haering, Frankfurt Summary minutes of the meeting on August 30, 2007

The ECB Shadow Council recommended, with a majority of 18 votes in favour, that the ECB Governing Council leave its key interest rate unchanged at 4 percent at its forthcoming policy meeting on September 6. One member favoured a rate hike to 4.25 percent.. The ECB has last raised its key interest rate in June.

There was a strong consensus within the Shadow Council that the current crisis in the credit market has significantly increased downside risks to growth. A number of members went further to say that it was likely, that growth would be dampened. This was reflected in downside revisions of growth and – to a lesser extent – inflation forecasts. The average growth forecast for 2008, of the ten members who regularly provide these forecasts, decreased from 2.3 to 2.1 Percent. The inflations forecast for 2008 went down to 1.9 percent. Underlying most of these forecasts was the assumption that the ECB key rate would stay at 4 percent for the next six months.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)
Year	HICP-Inflation in %	GDP-Growth in %
2006	2.2	2.8
2007	2.0 (2.0)	2.6 (2.7)
2008	1.9 (2.0)	2.1 (2.3)

All members agreed that the current crises in credit markets had substantially weakened the case for higher ECB rates. José Luis Escrivá, however, who recommended a rate hike to 4.25 percent, argued that such a hike would enable the ECB to convincingly communicate a prospective end to the current rate hike cycle. He felt that such a course of action would be best suited to keep market rates low.

All other members except Thorsten Polleit agreed with Mr. Escrivá that the ECB should keep the rate outlook completely open, refraining from communicating any bias toward higher rates. There was a very strong consensus that inflation prospects signalled no urgent need, if any, to raise interest rates further quickly. Therefore, almost all members judged that inflation risks from holding rates now were far smaller than the risk that a rate hike might excessively slow an economy already grappling with the consequences of the ongoing financial crisis. Waiting to see how long the liquidity crunch in the money markets would last and what the consequences for the economy might be, was considered the better option. Mr Polleit did not vote for a rate hike for the first time since November 2004 on the grounds that the current upheaval in credit markets would likely result in significantly tighter lending conditions, slowing down money and credit creation, a development he said he would welcome.

Several members advocated an overhaul of the ECB’s communication policy, criticizing the policy of (conditional) pre-commitments by use of code-words. These members described the events of the last weeks as “embarrassing” for the ECB. President Jean-Claude Trichet had practically per-announced a rate hike for the next policy meeting at the last press conference on August 3 by use of the expression “strong vigilance”, but later distanced himself from this message in light of the financial market turbulences. Many members favoured an approach of talking about the direction of risks to price stability, but without indicating a time frame or probabilities for policy reactions to these risks.

The ECB’s recent efforts to provide banks with extra liquidity to make up for the drying up of money markets, were applauded in general but criticised in detail. Willem Buiter was particularly critical. He argued that the right policy was to lend freely at a punitive rate and to help keep important financial markets liquid. He criticised the ECB’s policy of providing almost unlimited overnight credit for an interest rate around the minimum bid rate as a subsidy to those banks who did not need help, while failing to help those with a lack of suitable collateral to borrow against from the ECB. Rather than providing credit cheaply, Mr. Buiter urged the ECB to help ease the credit crunch by expanding the range of acceptable collateral. Asset backed short term securities, which are currently very hard to sell, could thus be used to refinance. Mr. Buiter’s suggestions were supported by many members of the Shadow Council. Only José Luis Escrivá cautioned that the ECB was right to insist on top quality collateral to protect tax payers’ interests.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)
Member*	Affiliation	Vote
Majority Recommendation		no change
Thorsten Polleit	ECB-Observer and Barclays Capital, Frankfurt	no change
Joachim Fels	Morgan Stanley, London	no change
Willem Buiter	London School of Economics and Goldman Sachs	no change
Thomas Mayer	Deutsche Bank, London	no change
Daniel Gros	Center of European Policy Studies (CEPS), Brussels	no change
Giancarlo Corsetti	European University Institute, Florence	no change
Stephen King	HSBC, London	no change
Luigi Buttiglione	Fortress, London	no change
Véronique Riches-Flores	Société Générale, Paris	no change
Jacques Cailloux	Royal Bank of Scotland, London	no change
Josè Alzola	Citigroup, London	no change
Jean-Michel Six	Standard & Poor's, London	no change
José Luis Escrivá	BBVA, Madrid	hike 0.25
Michael Heise	Dresdner Bank / Allianz, Frankfurt	no change
Gernot Nerb	Ifo-Institute, Munich	no change
Agnès Bénassy-Quéré	CEPII, Paris	no change
Julian Callow	Barclays Capital, London	no change
Charles Wyplosz	Graduate Institute of International Studies, Geneva	no change
Angel Ubide	Tudor Investment Corporation, Washington D.C.	no change

Friday, August 31, 2007
Norbert Haering, Frankfurt

Summary Minutes of the Meeting on July 26

The ECB Shadow Council recommended, with a majority of 16 votes in favour, that the ECB Governing Council leave its key interest rate unchanged at 4 percent at its forthcoming policy meeting on August 2. Three members favoured a rate hike to 4.25 percent, the same number as a month earlier. The ECB last raised its key interest rate in June.

This was the first time since the beginning of the current tightening cycle in December 2005, that two months after the last rate hike, support for an immediate further hike was so low and did not increase compared to the previous month. However, this does not seem to imply that support for further tightening has dissipated. Of the 16 members voting for a recommendation of unchanged rates at least eight hold the view that rates will probably have to be raised somewhat further.

Regarding growth prospects of the Eurozone economy, the predominant view was that there would be some moderation of growth after the strong expansion in the last few quarters, down to rates around or slightly above the growth potential. The eleven members who regularly provide detailed economic forecasts on average foresee a growth rate of 2.7 percent this year, slightly up from a month ago. The average forecast for 2008 went up a notch to 2.3 percent, while inflation forecasts remained unchanged at 2.0 percent this year and 1.9 percent for next year. These forecasts were produced under the assumptions that the ECB would raise its key rate to 4.25 percent within the next three months and that there was a 50 percent chance of a hike to 4.5 percent by year-end.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)
Year	HICP-Inflation in %	GDP-Growth in %
2006	2.2	2.8
2007	2.0 (2.0)	2.7 (2.6)
2008	2.0 (1.9)	2.3 (2.3)

The discussion focused on risks for the Eurozone economy stemming from the recent appreciation of the euro, increased oil prices and recent developments of financial markets. High oil prices were occasionally mentioned as a risk factor but did not gain prominence in the discussion. There was a widely held view that high prices resulted from strong global activity levels and demand rather than supply disruptions. Regarding the euro appreciation the majority view was that the exchange rate has lost significance for the economy due to monetary union. It was noted that the economy was so far coping very well. Several members argued that the depreciation of the dollar was a very welcome element of global rebalancing. Several members mentioned that the appreciation in trade weighted real terms over the last two years has been very modest. A large minority, however, warned against underestimating the impact of a strong currency, describing the euro as clearly overvalued. They cited econometric evidence showing that the exchange rate had a strong impact on the economy, even stronger than interest rate changes. They also warned of the tendency of the market to overshoot and thus argued against raising interest rates precisely at a time of heightened volatility with a high danger of an overshoot. Several members said the ongoing correction in credit markets was more significant than the euro appreciation. Increasing risk premiums were generally regarded as normalization, but several members judged that the size of the movements in certain markets bordered on the disorderly.

The consensus view emerged that recent developments in financial markets should prompt the ECB to proceed very carefully with the limited further tightening, which a majority of Shadow Council members still regards as appropriate.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)
Member*	Affiliation	Vote
Majority Recommendation		no change
Thorsten Polleit	ECB-Observer and Barclays Capital, Frankfurt	hike 0.25
Joachim Fels	Morgan Stanley, London	no change
Willem Buiter	London School of Economics and Goldman Sachs	hike 0.25
Thomas Mayer	Deutsche Bank, London	no change
Daniel Gros	Center of European Policy Studies (CEPS), Brussels	no change
Giancarlo Corsetti	European University Institute, Florence	no change
Stephen King	HSBC, London	hike 0.25
Luigi Buttiglione	Rubicon, London	no change
Véronique Riches-Flores	Société Générale, Paris	no change
Jacques Cailloux	Royal Bank of Scotland, London	no change
Josè Alzola	Citigroup, London	no change
Jean-Michel Six	Standard & Poor's, London	no change
José Luis Escrivá	BBVA, Madrid	no change
Michael Heise	Dresdner Bank / Allianz, Frankfurt	no change
Gernot Nerb	Ifo-Institute, Munich	no change
Agnès Bénassy-Quéré	CEPII, Paris	no change
Julian Callow	Barclays Capital, London	no change
Charles Wyplosz	Graduate Institute of International Studies, Geneva	no change
Angel Ubide	Tudor Investment Corporation, Washington D.C.	no change

Friday, June 27, 2007
Norbert Haering, Frankfurt;   Jacques Cailloux, London

Summary Minutes of the Meeting on June 28

The ECB Shadow Council recommended, with a majority of 16 votes in favour, that the ECB Governing Council leave its key interest rate unchanged at 4 percent at its forthcoming policy meeting on July 5. Three members favoured a rate hike to 4.25 percent. The ECB had last raised its key interest rate in June 2007.

The Shadow Council discussed the degree of slack in the Eurozone economy. There were two camps of similar size, each concentrating on different indicators of resource utilization. One camp focused on capacity utilization in industry, which, it was noted, had risen to a level even beyond the peak of the boom year 2000. The other camp pointed to subdued wage growth and labour costs, arguing that there must be some slack left in the economy, if there is not more cost pressure from labour. Moreover, the latter group argued that any shortages in supply could be alleviated easily through higher imports.

The opposing camp warned against putting too much stock on the development of labour costs, arguing that the “globalization of labour costs” was keeping wage growth down. High demand could produce price pressures, even in the absence of excessive wage growth as it could lead to higher mark-ups over labour costs and higher non-labour costs, thus creating inflation even without excessive wage growth. Regarding growth prospects of the Eurozone economy, the predominant view was that there would be some moderation of growth after the strong expansion in the last few quarters, down to rates that would leave overall capacity utilization of the economy more or less constant.

Those who diagnosed some remaining slack in the economy therefore did not see a need to hike rates further, while the other camp either proposed a rate hike or expressed a predisposition to vote for a hike recommendation in the months to come. Several members also mentioned high growth rates of money and credit as an argument to tighten monetary policy further.

The eleven members who regularly provide detailed economic forecasts on average foresee a growth rate of 2.6 percent this year, unchanged from a month ago. The average forecast for 2008 went up a notch to 2.3 percent, while inflation forecasts remained unchanged at 2.0 percent this year and 1.9 percent for next year. These forecasts were produced under the assumptions that the ECB would raise its key rate to 4.25 percent within the next three months and that there was a 50 percent chance of a hike to 4.5 percent by year-end.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)
Year	HICP-Inflation in %	GDP-Growth in %
2006	2.2	2.8
2007	2.0 (2.0)	2.6 (2.6)
2008	1.9 (1.9)	2.3 (2.2)

New members: The ECB Shadow Council welcomed three new members: José Luis Alzola, Director of Research at Citigroup, Jacques Cailloux, European Chief Economist at Royal Bank of Scotland, and Jean-Michel Six, European Chief Economist at Standard & Poor’s, all three based in London. They replace outgoing members Philip Lane and André Sapir and Marie Diron, who is on maternity leave from her position at Brevan Howard and from the ECB Shadow Council.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)
Member*	Affiliation	Vote
Majority Recommendation		no change
Thorsten Polleit	ECB-Observer and Barclays Capital, Frankfurt	hike 0.25
Joachim Fels	Morgan Stanley, London	no change
Willem Buiter	London School of Economics and Goldman Sachs	hike 0.25
Thomas Mayer	Deutsche Bank, London	no change
Daniel Gros	Center of European Policy Studies (CEPS), Brussels	no change
Giancarlo Corsetti	European University Institute, Florence	no change
Stephen King	HSBC, London	hike 0.25
Luigi Buttiglione	Rubicon, London	no change
Véronique Riches-Flores	Société Générale, Paris	no change
Jacques Cailloux	Royal Bank of Scotland, London	no change
Josè Alzola	Citigroup, London	no change
Jean-Michel Six	Standard & Poor's, London	no change
José Luis Escrivá	BBVA, Madrid	no change
Michael Heise	Dresdner Bank / Allianz, Frankfurt	no change
Gernot Nerb	Ifo-Institute, Munich	no change
Agnès Bénassy-Quéré	CEPII, Paris	no change
Julian Callow	Barclays Capital, London	no change
Charles Wyplosz	Graduate Institute of International Studies, Geneva	no change
Angel Ubide	Tudor Investment Corporation, Washington D.C.	no change

Friday, June 29, 2007
Norbert Haering, Frankfurt;   Daniel Gros, Brussels

Summary Minutes of the Meeting of the ECB Shadow Council on May 31, 2007

The ECB Shadow Council recommended, with a majority of 18 votes in favour, that the ECB Governing Council raise its key interest rate to four percent at its forthcoming policy meeting on June 6. One member favoured a recommendation of an unchanged key rate, instead.

It was generally agreed that business cycle indicators and GDP growth in the first quarter had continued to surprise on the upside, which was taken as a strong sign that the economy was weathering the euro appreciation and the large German VAT-hike quite well. There was a marked upgrading of growth projections for this year, caused by higher than expected growth in the first quarter. The average forecast of members went up to 2.6 percent from 2.3 percent, which is only slightly above ECB projections from March. The average forecast for 2008 remained unchanged at 2.2 percent. The average inflation forecast of Shadow Council members for this year went up a notch to two percent and remained unchanged at 1.9 percent for 2008.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)
Year	HICP-Inflation in %	GDP-Growth in %
2006	2.2	2.8
2007	2.0 (1.9)	2.6 (2.3)
2008	1.9 (1.9)	2.2 (2.2)

Most members judged the current rate of 3.75 percent to still be slightly on the side of stimulating the economy. They argued that some more “normalization” of the rate level was in order, given strong growth and favourable growth prospects. There was general agreement about the absence of imminent threats to price stability, given stable unit labour costs in the Euro area.

Joachim Fels, who preferred a recommendation of unchanged rates warned, that higher growth forecasts were just based on higher current growth and an extrapolation of recent trends. He expects a marked deceleration of the economy in the second half of the year, brought about by the lagged effect of higher ECB rates and long term yields and of the Euro appreciation. Several members expressed some sympathy with this view, but held, that there were not enough indications, yet, of an impending slowdown.

About a third of the members explicitly voiced the opinion that the key rate will have to be raised above four percent upon current information. A smaller group said that the impending rate hike to four percent, which is generally conceived to be already pre-announced by the ECB, would most likely be the last they would support in the current cycle.

The Shadow Council discussed the usefulness of the monetary pillar of the ECB. There was wide consensus that monetary indicators sometimes contain important information and should be analysed by the central bank. The majority view was that the information content varied with time and thus assigning monetary indicators the role of a separate pillar of the strategy amounted to excessive emphasis much of the time. Some members argued for broadening the scope of the monetary pillar to a comprehensive analysis of financial developments with a focus on financial risks. Others defended the monetary pillar as a potential source of early warning signals that something “was going wrong”.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)
Member*	Affiliation	Vote
Majority Recommendation		hike 0.25
Thorsten Polleit	ECB-Observer and Barclays Capital, Frankfurt	hike 0.25
Joachim Fels	Morgan Stanley, London	no change
Thomas Mayer	Deutsche Bank, London	hike 0.25
Willem Buiter	London School of Economics and Goldman Sachs	hike 0.25
Daniel Gros	Center of European Policy Studies (CEPS), Brussels	hike 0.25
André Sapir	Université Libre de Bruxelles and Bruegel	hike 0.25
Stephen King	HSBC, London	hike 0.25
Véronique Riches-Flores	Société Générale, Paris	hike 0.25
Luigi Buttiglione	Rubicon, London	hike 0.25
Giancarlo Corsetti	European University Institute, Florence	hike 0.25
Marie Diron	Brevan Howard, London	hike 0.25
José Luis Escrivá	BBVA, Madrid	hike 0.25
Michael Heise	Dresdner Bank / Allianz, Frankfurt	hike 0.25
Philip Lane	Trinity College Dublin	hike 0.25
Gernot Nerb	Ifo-Institute, Munich	hike 0.25
Agnès Bénassy-Quéré	CEPII, Paris	hike 0.25
Julian Callow	Barclays Capital, London	hike 0.25
Charles Wyplosz	Graduate Institute of International Studies, Geneva	hike 0.25
Angel Ubide	Tudor Investment Corporation, Washington D.C.	hike 0.25

Friday, June 1, 2007
Norbert Haering, Frankfurt

Summary Minutes of the Meeting of the ECB Shadow Council on May 3, 2007

The ECB Shadow Council recommended, with a majority of 13 votes in favour, that the ECB Governing Council leave its key interest rate unchanged at 3.75 percent at its forthcoming policy meeting on May 10. Six members favoured a recommendation of an increase to four percent, instead.

Most market participants perceive the ECB as having clearly signalled an increase to four percent in June. In keeping with standard practice of the Shadow Council, members disregarded market expectations created by the ECB when issuing their rate recommendations.

There was an extensive discussion about the role that the recent appreciations of the euro schould play in setting the key interest rate. There was widespread agreement that the appreciation so far has not been dramatic enough to suggest an end to the ECB’s policy of gradual monetary tightening. It was noted that business cycle indicators had continued to surprise on the upside, which was taken as a strong sign that the economy was weathering the euro appreciation quite well. Members argued that growth expectations have so far not been dented by the euro appreciation and that there was even a good chance that the ECB would have to revise up its growth projections in June.

Indeed, growth expectations of the members of Shadow Council for 2007 remained unchanged at 2.3 percent, which is slightly below ECB projections from March. The average forecast for 2008 increased slightly to 2.2 percent. The average inflation forecast of Shadow Council members remained at slightly below two percent in both years.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)
Year	HICP-Inflation in %	GDP-Growth in %
2006	2.2	2.8
2007	1.9 (1.8)	2.3 (2.3)
2008	1.9 (1.9)	2.2 (2.1)

While a number of members criticized the policy of the ECB of pre-announcing rate hikes as overly inflexible, the majority thinks that raising rates around June is indeed a reasonable policy, if judged upon currently available information. Of the 13 members who favoured no change in May, most held the view that at least one more interest rate hike in the near future would be warranted.

Beyond that, however, there was disagreement over the degree of attention the ECB should pay to currency movements. A significant minority suggested that the ECB should exclusively consider the exchange rate as an input into forecasts for growth and inflation and judged the impact of the euro on the Eurozone economy to be rather moderate. This group argued that the euro zone is a large and fairly closed economy, not dissimilar to the US. They conjectured that the emphasis that many place on the exchange rate might be a legacy of the pre-euro past.

This view was challenged on the grounds that the export share of the euro zone was significantly higher than the one of the US. Furthermore it was noted that the US was different because most international trade was invoiced in their home currency.

There was no consensus either on whether the recent appreciation of the euro has gone beyond what fundamentals would suggest. A few participants argued that the ECB should not support further divergence of the euro from its fundamental value, whereas a larger group held that the euro appreciation is well grounded whatever the European monetary policy.

However, the majority worried that an overly tight monetary policy, which did not take account of the exchange rate, might push the Euro to a level at which it would jeopardize the ongoing economic expansion. It was noted that the dampening effect of an exchange rate appreciation has a time lag that might even have increased recently, due to improved hedging. Most members of this group hold the view that the ECB should put its tightening cycle on hold after the next rate increase, if the euro should stay strong or even appreciate further.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)
Member*	Affiliation	Vote
Majority Recommendation		no change
Thorsten Polleit	ECB-Observer and Barclays Capital, Frankfurt	hike 0.25
Joachim Fels	Morgan Stanley, London	no change
Thomas Mayer	Deutsche Bank, London	no change
Willem Buiter	London School of Economics and Goldman Sachs	hike 0.25
Daniel Gros	Center of European Policy Studies (CEPS), Brussels	hike 0.25
André Sapir	Université Libre de Bruxelles and Bruegel	hike 0.25
Stephen King	HSBC, London	hike 0.25
Véronique Riches-Flores	Société Générale, Paris	no change
Luigi Buttiglione	Rubicon, London	no change
Giancarlo Corsetti	European University Institute, Florence	hike 0.25
Marie Diron	Brevan Howard, London	no change
José Luis Escrivá	BBVA, Madrid	no change
Michael Heise	Dresdner Bank / Allianz, Frankfurt	no change
Philip Lane	Trinity College Dublin	no change
Gernot Nerb	Ifo-Institute, Munich	no change
Agnès Bénassy-Quéré	CEPII, Paris	no change
Julian Callow	Barclays Capital, London	no change
Charles Wyplosz	Graduate Institute of International Studies, Geneva	no change
Angel Ubide	Tudor Investment Corporation, Washington D.C.	no change

Friday, May 4, 2007
Norbert Haering, Frankfurt,   Agnès Bénassy-Quéré, Paris

Recommendation for the ECB meeting on April 12

The ECB Shadow Council recommended, with a majority of 16 votes in favour, that the ECB Governing Council leave its key interest rate unchanged at 3.75 percent at its forthcoming policy meeting on April 12. Two members favoured a recommendation of a rate increase, instead, one by a quarter point and one by half a point. One vote was not available. In departure from the usual procedure the vote was taken via e-mail.

For the third consecutive month, growth expectations of Shadow Council members have been revised upwards, while inflation forecasts have been revised down. As regards 2007 the average forecasts closely match ECB projections from March, while for 2008 it is significantly below the midpoint of the ECB projections for growth and slightly below for inflation.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)
Year	HICP-Inflation in %	GDP-Growth in %
2006	2.2	2.8
2007	1.8 (1.9)	2.3 (2.2)
2008	1.9 (1.9)	2.1 (2.1)

At a time when financial markets have mostly discounted a further ECB rate hike to four percent by June, only a good third of Shadow Council members expressed a clear bias in favour of higher rates. Another good third of members explicitly declared the absence of a bias in either direction. The others expressed a slight upward bias.

Members’ comments revealed that many feel that the external environment for the euro area economy has become less favourable or at least more uncertain. The main concern war the slowdown in the US real estate market. However, there was no consensus on how strongly this would effect the wider US economy and the euro area.

The current wage round was perceived by most members as having proceeded without major unfavourable surprises so far.

Members`individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)
Member*	Affiliation	Vote
Majority Recommendation		no change
Thorsten Polleit	ECB-Observer and Barclays Capital, Frankfurt	hike 0.5
Joachim Fels	Morgan Stanley, London	no change
Thomas Mayer	Deutsche Bank, London	no change
Willem Buiter	London School of Economics and Goldman Sachs	hike 0.25
Daniel Gros	Center of European Policy Studies (CEPS), Brussels	no change
André Sapir	Université Libre de Bruxelles and Bruegel	no change
Stephen King	HSBC, London	no change
Véronique Riches-Flores	Société Générale, Paris	no change
Luigi Buttiglione	Rubicon, London	no change
Giancarlo Corsetti	European University Institute, Florence	n/a
Marie Diron	Brevan Howard, London	no change
José Luis Escrivá	BBVA, Madrid	no change
Michael Heise	Dresdner Bank / Allianz, Frankfurt	no change
Philip Lane	Trinity College Dublin	no change
Gernot Nerb	Ifo-Institute, Munich	no change
Agnès Bénassy-Quéré	CEPII, Paris	no change
Julian Callow	Barclays Capital, London	no change
Charles Wyplosz	Graduate Institute of International Studies, Geneva	no change
Angel Ubide	Tudor Investment Corporation, Washington D.C.	no change

Friday, March 30, 2007
Norbert Häring, Frankfurt

Summary Minutes of the Meeting of the ECB Shadow Council on March 1, 2007

The ECB Shadow Council recommended, with a majority of 14 votes in favour, that the ECB Governing Council raise its key interest rate by a quarter point to 3.75 percent at its forthcoming policy meeting on March 8. Five members favoured a recommendation of unchanged rates, instead. Two of the members voting for higher rates would have preferred a larger rate increase to 4.0 percent. The ECB last raised its key interest rate in December to 3.5 percent. Last month , the Shadow Council had already recommended a rate rise with a slim majority, while the ECB had left rates unchanged.

Members grew more confident about inflation prospects and about growth prospects. The nine members who regularly submit detailed economic projections expect to be below the ECB’s stability threshold of two percent (this year and next. Expectations for growth have improved further to 2.2 percent in 2007 and 2.1 percent 2008.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)
Year	HICP-Inflation in %	GDP-Growth in %
2006	2.2	2.8 (2.7)
2007	1.9 (2.0)	2.2 (2.0)
2008	1.9 (1.9)	2.1 (2.0)

The majority in favour of a rate hike argued that relatively strong growth made it likely that the negative output gap in the euro area had closed or would soon be closing, leading to more inflation pressure through higher wages. The majority deemed it important for the central bank to tighten monetary policy already in anticipation of this expected development. It was stressed that the consensus forecasts were derived under the working assumption that the ECB would hike rates further to 3.75 percent or four percent. Therefore, it was argued by proponents of a rate hike that benign inflation and growth forecasts did not qualify as an argument against the need for a rate hike. Continued strong money and credit growth was also cited as an argument for higher rates by several members.

Members of the minority perceived the risk or even held the expectation that growth would slow down significantly soon, removing the need for ECB action to cool down the economy. The strong euro, which might rise further, signs of a cooling of the external environment and the uncertain effects of the German VAT hike were cited in support of this view. Members of the majority were mostly not convinced. It was argued that one month would not make a big difference regarding available information and one should not wait for ever. Rather, it was argued, the ECB should be ready to reverse course if the economy developed in an unexpected and unfavourable way. One member argued that not hiking rates in the face of such strong growth would send a confusing signal ahead of the upcoming wage negotiations.

There was a significant bias in the membership to think that rates will probably have to be raised beyond 3.75 percent in the near term. Of those membes who argued for a rte hike at the next ECB meeting, eight members expressed a strong inclination to push for further rate hikes.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)
Member*	Affiliation	Vote
Majority Recommendation		hike 0.25
Thorsten Polleit	ECB-Observer and Barclays Capital, Frankfurt	hike 0.5
Joachim Fels	Morgan Stanley, London	no change
Thomas Mayer	Deutsche Bank, London	hike 0.25
Daniel Gros	Center of European Policy Studies (CEPS), Brussels	hike 0.25
Willem Buiter	London School of Economics and Goldman Sachs	hike 0.5
André Sapir	Université Libre de Bruxelles and Bruegel	hike 0.25
Michael Heise	Dresdner Bank / Allianz, Frankfurt	no change
Luigi Buttiglione	Rubicon, London	hike 0.25
Stephen King	HSBC, London	hike 0.25
Giancarlo Corsetti	European University Institute, Florence	hike 0.25
Marie Diron	Brevan Howard, London	hike 0.25
Véronique Riches-Flores	Société Générale, Paris