Summary minutes of the meeting on November 29, 2007

On the occasion of its fifth anniversary the ECB Shadow Council met in London. The Council voted in favour of unchanged interest rates with a majority of 13 votes. Six members voted in favour of an immediate rate cut of 25 basis points to 3.75 percent. All but one member of the majority expressed some form of bias toward lower rates. There was near unanimity that the ECB should remove their own rate hike bias in their communication.

Many members have become significantly more sceptical regarding the economic outlook of the euro area since last month. The average forecast for growth next year declined to 1.7 percent from 1.9 percent previously. On the other hand, the average inflation forecast for 2008 also went to 2.2 percent from 2.0 percent previously.

The discussion was dominated by the economic outlook. Where was a broad consensus that inflation would come down again after the current spike to around three percent. Still, some members argued that it was not advisable to cut interest rates, at a time when actual inflation was running so clearly above target. These members feared that such a move might call the inflation fighting resolve of the ECB in question.

Members listed a number of factors that would act as brakes to the economic expansion. Those were the high value of the euro, high oil prices, less support form external demand and reduced availability of credit due to the problems of the banking sector.

Many members expressed the view that uncertainty regarding macroeconomic prospects was unusually high currently. Most drew the conclusion that the right thing for the ECB was to wait until the uncertainty has receded. Those who voted in favour of a rate cut argued that uncertainty was mostly concerning the severity of any slowdown in activity, while the slowdown itself was all but certain. These members argued that a rate cut which proved to be unnecessary later could easily be undone, while cutting rates letter would be less effective, if a cut was indeed needed. . Some members suggested that the ECB should try intervention, if possible concerted, to stop the appreciation of the euro. However, others were sceptical, saying that this would not do anything if rate policy was not changed accordingly.

Regarding the ECB’s money market steering activities one member suggested the ECB should narrow the corridor around the minimum bid rate, by raising the rate of marginal borrowing facility from three to 3.5 percent and cutting the marginal lending rate from five to 4.5 percent. No consensus was reached on this proposal, either. Other members preferred the generous provision of short and medium term liquidity.

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

The Shadow Council decided not to follow the ECB Governing Council in extending its membership size to 21. Rather the Shadow Council will reduce membership to 15. Where was broad consensus that a committee of 21 was far too large to allow for efficient decision making.