ECB Shadow Council minutes of the meeting October 30, 2008

The ECB Shadow Council recommends that the European Central Bank cut its key interest rate by a full percentage point to 2.75 percent at its next policy meeting on November 6. The decision was taken with eight votes in favour while the seven remaining members preferred a recommendation of a half point cut. Behind the unprecedented recommendation is a very sharp drop in growth prospects and a consensus that the euro area is facing a recession.

The recommendation of the Shadow Council comes after the ECB cut interest rates by half a percentage point to 3.75 percent on October 8 in a coordinated action with other central banks.

Even the least pessimistic forecasters on the Shadow Council agree that the euro area is facing a recession. The average growth forecast for 2009 plunged from plus 0.8 percent to minus 0.4 percent. Members now expect the decline in commodity prices and the decline in demand to push down inflation back below two percent on average next year.

20083.4 (3.5)1.0 (1.3)
20091.9 (2.3)-0.4 (0.8)

Contributors:. E. Bartsch; J. Cailloux; J. Callow; M. Diron; S. King; T. Mayer; E. Nielsen; J.-M. Six
Assumptions: Forecasters assumed on average that the ECB would cut its key rate to 3.25 percent within the next three months and to 3.0 percent within six months.

Members judged that the last two months of financial turmoil would have a deep and lasting impact on the real economy. They mentioned tightening financing conditions for companies, rapidly deteriorating growth prospects in central and eastern European countries, which have recently been affected by the turmoil, as well as signs of a sharp slowdown of demand from emerging markets in general. They also pointed to plunging activity and sentiment indicators from the euro area itself.

Those members who favoured an interest rate cut of a full percentage point argued that it was virtually certain that interest rates would have to come down by at least that much. They considered that the state of the economy was so precarious that cutting rates slowly would only waste precious time. Those who favoured a somewhat more gradualist approach held that a series of medium sized rate cuts in short sequence might have a stronger impact than one large cut. Some members further feared that a very large rate cut might be over-interpreted by wary markets, that it could be considered a signal of ‘desperation’ on the part of the central bank - a cut accompanied by a clear stance of an expansionary bias could be equally effective as a large cut upfront.argument was contested on the grounds that there was already wide agreement among financial market participants that rates needed to go down significantly.

There was a consensus on the Shadow Council that inflation could be expected to decline sharply on the back of falling commodity prices and weak demand. Some members stressed that it was important for the ECB to convey to the public that it would act with determination to fend of any danger of deflation.

Most members judged that upon current information the ECB should aim to lower ist key rate to between 2 to 2.5 percent, with several members insisting that the ECB should be prepared to go even lower.

Members agreed that monetary policy alone would not be enough to prevent a deep recession and that fiscal policy urgently needed to play its part, too. While some members suggested that the ECB should urge governments to institute an expansionary fiscal policy and to coordinate monetary and fiscal policies, other members insisted that the ECB had no mandate to talk about fiscal policy and that explicit coordination was neither feasible nor necessary.

Membership Changes

Elga Bartsch, Chief European Economist of Morgan Stanley joined the Shadow Council to replace Michael Hume, who joined the Bank of England as economic advisor to the MPC. Christian Bordes, Professor at the Centre d'economie de la Sorbonne, Paris 1 accepted the invitation to fill the next vacancy on the Shadow Council.

Members' individual votes for September 4 (and bias*):
Jose AlzolaThe Observatory Groupcut 0.5    (down)
Elga BartschMorgan Stanleycut 0.5    (down)
Agnes Benassy-QuereCEPIIcut 0.5    (down)
Jacques Cailloux


cut 1.0   (down)
Julian CallowBarclays Capitalcut 1.0    (down)
Giancarlo CorsettiEurop. Univ. Institutecut 0.5   (down)
Marie DironOxford Economicscut 0.5   (down)
Daniel GrosCEPScut 1.0    (down)
Stephen King


cut 1.0   (down)
Thomas Mayer

Deutsche Bank

cut 1.0    (down)
Gernot NerbIfo-Institutecut 0.5   (down)
Erik NielsenGoldman Sachscut 1.0     (down)
Jean-Michel SixStandard & Poor'scut 0.5    (down)
Angel UbideTudorcut 1.0     (down)
Charles WyploszGrad. Institute. Genevacut 1.0   (down)

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

Frankfurt, October 31
Norbert Häring

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