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.
|CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL|
(Last month's forecast in parentheses)
|Year||HICP-Inflation in %||GDP-Growth in %|
|2008||3.1 (2.7)||1.5 (1.5)|
|2009||2.1 (2.0)||1.4 (1.5)|
Forecasters: J. Alzola; J. Cailloux; J. Callow; S. King; J. Fels; T. Mayer; V. Riches-Flores; J.M. Six
Most forecasters have assumed that the ECB key rate will be 4.0 percent for the next three months and decline to 3.75 percent within six months.
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)|
|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||*)|
*) The two non-voting members at this meeting argued in favour of unchanged rates.
April 30, 2008
Norbert Häring, Frankfurt