Konjunktur
ECB Shadow Council: Minutes of the Meeting on September 25

Following its regular monthly meeting, the ECB Shadow Council was unanimous in recommending that the ECB consider an interest rate cut within the next three months, although there was a slim majority of eight members who recommended that the ECB leave its key rate unchanged at 4.25 percent at the next policy meeting on October 2.

Following its regular monthly meeting, the ECB Shadow Council was unanimous in recommending that the ECB consider an interest rate cut within the next three months, although there was a slim majority of eight members who recommended that the ECB leave its key rate unchanged at 4.25 percent at the next policy meeting on October 2.

All those members favouring an unchanged policy at this Thursday's meeting said that they now considered that a monetary easing would be necessary within three months. Their reasoning for arguing in favour of an unchanged policy at the current time largely resulted from a desire for the ECB not to change policy at a time of financial turmoil and at a time when the headline inflation rate was very elevated.

Meanwhile, the remaining seven members argued in favour of an immediate rate cut. Of these, one preferred a rate cut of 50 basis points, the others one of 25 basis points. There was general agreement that risks to growth are materializing and that a significant downturn was underway. The average GDP growth forecast for 2009 of the eight members who regularly submit economic projections was unchanged at 0.8 percent. This was influenced by a membership change. The seven members who had provided a forecast also a month earlier revised their forecast down from 0.8 percent to 0.7 percent. Due to the fall in oil prices, members revised down their inflation forecast for 2009 from 2.5 percent to 2.3 percent.

HICP-InflationGDP-Growth
20072.12.7
20083.5 (3.6)1.3 (1.3)
20092.3 (2.5)0.8 (o.8)


Contributors:. J. Cailloux; J. Callow; M. Diron; M. Hume; S. King; T. Mayer; E. NIelsen; J.-M. Six
Assumptions: All forecasters assumed an unchanged ECB rate of 4.25 percent for the next six months. .


Members' main argument in favour of lower rates was that the economic climate was worsening precipitously.. Members mentioned that money market rates, which they consider an important element of the monetary transmission process, were excessively high and contended that this should be counterbalanced by lower key rates. A further argument was that the invesrse yield curve, with longer term yields below short term rates added to the problems of the banking sector, as their usual business of borrowing short and lending long was not profitable under these circumstances.

While most members considered that the risk of an inflationary price-wage-spiral was quickly receding, there was disagreement on the implications of the high current inflation rate for monetary policy. While some members argued for a forward looking policy, incorporating the projected decline in inflation, others warned against lowering rates at a time when the inflation rate stood at 3.8 percent. They argued in favour of waiting some more time, until a decline of inflation was clearly in evidence.

Another argument brought forward against cutting interest rates already at the upcoming ECB meeting was the perceived signal this would send about the ECB's assessment of the financial crisis. Some members feared that such an action could be seen to be an easing driven by a sense of panic. They argued in favour of waiting until the outline of the US rescue package was clear and the mooed on financial market had calmed.

Membership Changes:

Erik Nielsen, European Chief Economist of Goldman Sachs joined the ECB Shadow Council to replace outgoing member Veronique Riches-Flores.

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Members' individual votes for September 4 (and bias*):
Jose AlzolaConsultantcut 0.25    (down)
Agnes Benassy-QuereCEPIIcut 0.25     (down)
Jacques Cailloux

RBS

no change (down)
Julian CallowBarclays Capitalcut 0.5     (down)
Giancarlo CorsettiEurop. Univ. Instituteno change (down)
Marie DironOxford Economicsno change (down)
Daniel GrosCEPSno change (down)
Michael Humecut 0.25     (down)
Stephen King

HSBC

no change (down)
Thomas Mayer

Deutsche Bank

cut 0.25     (down)
Gernot NerbIfo-Instituteno change (down)
Erik NielsenGoldman Sachsno change (down)
Jean-Michel SixStandard & Poor'sno change (down)
Angel UbideTudorcut 0.25     (down)
Charles WyploszGrad. Institute. Genevano change (down)


* Lead question regarding the bias: Upon current information, should rates be lower or higher in about three months time?



Frankfurt, September 29
Norbert Häring

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