Summary minutes of the meeting on February 28, 2008

The ECB Shadow Council recommended, with a slim majority of 8 out of 15 votes, that the ECB Governing Council leave its key interest rate unchanged at 4 percent at its forthcoming policy meeting on March 3. Seven members recommended a rate cut by 25 basis points, instead. Of the eight members who voted for unchanged rates, most expressed a clear bias toward lower rates, one expressed a strong bias toward higher rates. While the number of proponents of a rate cut increased only by one, several members joined this camp, while several others switched into the camp of those arguing for no change.

There was disagreement on whether the outlook for the real economy had improved or worsened. Several members focused on recent indicators, mostly business surveys, indicating that the slowdown in activity was only gradual. Others noted that the international picture, namely the prospects of the US economy had become clearer, on the negative side. On average forecasts for growth this year and next remained largely unchanged. At 1.5 percent the average growth forecast was half a percentage point below the latest ECB projections from December.

As regards inflation, forecasts for this year moved up further. Several members said that before supporting a rate cut they would need to see the inflation rate coming down markedly from its current rate of more than 3.2 percent and be sure that it has really peaked. Others relied more on forecasts of inflation declining below two percent again in 2009, helped by a decline in demand.

Several members from both camps noted that the rise of the Euro, who had just broken through 1.50 dollar, was going to help reduce inflation pressure and was going to dampen dmand. One member suggested that the ECB should take a softer stance, more in line with other central banks like the Federal Reserve and the Bank of England, because otherwise the Euro would appreciate further to the point of inflicting damage to the economy. Members were divided regarding the assessment of financial developments. One group focused on ongoing strong credit growth, concluding that banks were not curtailing their lending in response to the subprime credit crisis. Others conceded that the process of credit tightening was slow, but insisted that the worst was yet to come. They considered a significantly more restrictive stance of the banks in the future as a near certainty, given their large losses. One member said he was not voting for a cut mainly because cutting rates would allow banks to get new capital on the cheap, which would amount to bailing them out after they had lost a lot of money due to careless behaviour. Most other members disagreed, saying that the ECB should do what was appropriate for the economy. They insisted that dealing with reckless behaviour of banks was the responsibility of regulators and supervisors.

In keeping with its decision made in December the Shadow Council has only 15 voting members as of January 2008. Since there are still 17 members for a transition period two members did not formally vote at this meeting. These members’ leanings on rates are documented in the footnote of the table below. Luigi Buttiglione left his position at Fortress and the Shadow Council.

INDIVIDUAL VOTES (Recommended rate change in percentage points)
Member*	Affiliation	Vote
Josè Alzola	Citigroup, London	cut 25 bp
Agnès Bénassy-Quéré	CEPII, Paris	cut 25 bp
Willem Buiter	London School of Economics and Goldman Sachs	no change
Jacques Cailloux	Royal Bank of Scotland, London	no change
Julian Callow	Barclays Capital, London	no change
Giancarlo Corsetti	European University Institute, Florence	no change
Marie Diron	Ocford Economics	cut 25 bp
Joachim Fels	Morgan Stanley, London	cut 25 bp
Daniel Gros	Center of European Policy Studies (CEPS), Brussels	*)
Stephen King	HSBC, London	cut 25 bp
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	*)
Jean-Michel Six	Standard & Poor's, London	cut 25 bp
Angel Ubide	Tudor Investment Corporation, Washington D.C.	no change
Charles Wyplosz	Graduate Institute of International Studies, Geneva	no change