Summary minutes of the meeting on April 30, 2008

The ECB Shadow Council decided with a majority of nine members to recommend that the ECB leave its key rate unchanged at four percent at the next policy meeting on April10. Six members voted in favour of a rate cut of 25 basis points instead. This was up one from last month’s five votes for a cut, but one less than two months ago.

Since oil prices had risen more since last months meeting, approaching $120 per barrel, the familiar theme in forecast revisions prevailed. Members again revised up significantly their average inflation expectation for this year from 2.7 to 3.1 percent. On the other hand, growth expectations for next year were revised downward again to 1.4 percent, after an unchanged 1.5 percent this year. This would mean below trend growth in 2008 and 2009, which is significantly more pessimistic than the latest forecast by the ECB and most forecasts of international institutions.

The discussion at this meeting centred on the question if the ECB might be too ambitions in pursuing an inflation target of “close but below two percent.” There was broad consensus in the diagnosis with three stylized facts emerging:
(i) At the time when the ECB set their definition of price stability inflation was very low, which tempted the ECB to set a rather ambitious target for medium term inflation. (ii) Rapid productivity growth and rapid integration of emerging markets with a large pool of low paid workers held down global inflation in the 90s and early 2000s. (iii) These downward pressures on inflation have abated or even reversed. Energyy prices have gone up very strongly. Therefore, it will be much harder for central banks to achieve low rates of inflation.

A few members are of the opinion that the ECB’s definition of price stability is still appropriate. These members remarked that the ECB had in the past been flexible with respect to the time frame in which to achieve their target. They expressed their confidence that the ECB would show the same flexibility in the future, if it should turn out that bringing inflation down to below two percent swiftly would be too costly for the economy.

One member argued in favour of switching to a policy of monetary targeting.

The majority view, however, is that the inflation target of the ECB is overly ambitious. There was a broad consensus that declaring inflation rates slightly above or even at two percent as above target was problematic, because – faced with adverse price shocks - the ECB would often miss the target and loose credibility or be forced to pursue and overly restrictive policy to avoid this. While it was acknowledged that the ECB has often turned a blind eye at minor misses the majority argued that provoking to many such instances with an overly ambitious target would eventually undermine the credibility of the central bank.

A number of members argued for an outright raise of the inflation target or for putting a reasonably wide symmetrical tolerance band around it. Many argued, though, that doing so at a time when inflation was clearly above target would risk damaging the credibility of the central bank. There was a consensus view to recommend that the ECB be flexible in setting targets for the time span in which they intend to bring inflation down to target. Also, according to the consensus view, the ECB should devote a lot of effort – and possibly more than they currently do – to explaining in detail the various sources of inflation pressure responsible for any target overshoot, and the varying implications these different sources might have for monetary policy.

INDIVIDUAL VOTES (Recommended rate change in percentage points)
Member*	Affiliation	Vote
Josè Alzola	Citigroup, London	cut 25 bp
Agnès Bénassy-Quéré	CEPII, Paris	cut 25bp
Willem Buiter	London School of Economics and Goldman Sachs	*)
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	no change
Joachim Fels	Morgan Stanley, London	cut 25 bp
Daniel Gros	Center of European Policy Studies (CEPS), Brussels	no change
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	cut 25 bp
Jean-Michel Six	Standard & Poor's, London	no change
Angel Ubide	Tudor Investment Corporation, Washington D.C.	no change
Charles Wyplosz	Graduate Institute of International Studies, Geneva	*)