ECB Shadow Council sees no need to think about policy tightening

At the regular meeting of the ECB Shadow Council on 27 August 2009 there was near-unanimity that the ECB should not change its key interest rate at the next meeting. One of the 15 members did, however, prefer a rate cut to 0.5 percent. There was a consensus that according to current information the ECB should not think about tightening its policy stance before well into next year. However, a proposal recommendaing that the ECB issue an explicit commitment to keep rates low for an extended period of time did not find a majority on the committee. There was general agreement, however, that the ECB should do more to clarify its stance and intentions regarding unconventional policy measures.

Growth forecasts made by Shadow Council members improved for the first time since forecasts for 2009 were assembled in December 2007. The average GDP forecast for 2009 improved to minus 4.1 percent. For 2010 members now expect growth of 0.7 percent on average. These forecasts are significantly above the ECB?s June projections of minus 4.6 percent and minus 0.3 percent respectively (though the ECB will issue new projections on 3 September. The Shadow Council?s inflation forecasts were unchanged at low levels and remain roughly in line with the ECB?s June projections.

20090.3 (0.3)-4.1 (-4.4)
20101.1 (1.1)0.7 (0.4)

Contributors:. M. Annunziata; E. Bartsch; J. Cailloux; J. Callow; M. Diron, G. Horn, S. King; .J. Krämer; T. Mayer; E. Nielsen; J.-M. Six
Assumptions: Most forecasters assumed that the ECB would leave its key rate at 1% for the next six months.

On account of the improved economic outlook, all but one member considered that there was no grounds left to think that the next rate move should be a cut. Several members said they would have preferred a "clean" cut of the refinancing rate to 0.5 percent instead of the route that the ECB has chosen, i.e. pushing short term market rates below the refinancing rate. They felt, however, that now it was not necessary any more, to address this.

On the other hand, there was also near-unanimity that the sustainability of the economic recovery is not at all guaranteed. The effects of a deteriorating labour market were identified as a key risk. Therefore, no member expects to argue in favour of a rate hike during the next three months. Rather, a large majority considers it is advisable for the ECB to keep rates low and provide generous liquidity until well into next year.

Additionally, a few members argued in favour of a commitment by the ECB to keep rates low for an extended period of time, if no major unexpected developments occurred. They reasoned that this would help keep longer term interest rates low and support the upswing. However, most members remained sceptical that this was necessary and helpful. Some argued that a conditional commitment would not achieve much and that the ECB should avoid boxing itself in at a time of considerable uncertainty. Many argued that markets already had a clear enough idea of the ECB?s policy reaction function.

That said, concerning the ECB?s unconventional measures. almost all members pushed for more information, fearing that markets might misinterpret any change in the procedures of liquidity provision and asset purchases as a sign of a changing policy stance, even if that was not really intended. The fact that the ECB has consistently kept Eonia (the market rate for overnight interbank loans) significantly below the main policy rate was considered a "muddled" and largely unexplained policy choice by many.

Individual Votes

Members' individual votes for 3 September:
Jose AlzolaThe Observatory Groupno change
Marco Annunziata


no change
Elga Bartsch

Morgan Stanley

no change
Agnes Benassy-QuereCEPIIno change
Jacques Cailloux


no change
Julian CallowBarclays Capitalno change
Marie DironOxford Economicsno change
Gustav HornIMK Macroeconomic Policy Institutecut 0.5
Stephen King


no change
Jörg Krämer


no change
Thomas Mayer

Deutsche Bank

no change
Erik NielsenGoldman Sachsno change
Jean-Michel SixStandard & Poor'sno change
Angel UbideTudorno change
Charles WyploszGrad. Institute. Genevano change

Frankfurt, 28 August, 2009
Norbert Häring
Non-voting Chairman

Appendix 1

Quotes from individual members of the Shadow Council
(in no particular order)

"The recovery is still early and fragile. It is therefore important for the ECB to keep the foot on the accelerator in terms of stimulus, and to indicate that it has no intention to initiate an exit until there are firm signs that sustainable growth has been restored and the inflation forecast starts to include numbers at or above the target within the forecast period."
Erik Nielsen, Chief European Economist of Goldman Sachs

"The ECB should signal that it has no intention to add a premium on its upcoming long term operation. This would be an ingenuous way to signal that the policy rate will likely remain low for a long period without having to explicitly follow a Fed like explicit commitment"
Jacques Cailloux, Chief European Economist of Royal Bank of Scotland

"In my view, the recent more encouraging data flow provides little reason for the ECB to change its current policy stance. The ECB can leave the current refi rate level as well as the generous liquidity supply in place for an extended period of time."
Elga Bartsch, Chief European Economist of Morgan Stanley

"With signs of an emerging recovery, there is no need for shifts in monetary policy at this stage. However, there remains great uncertainty in both directions, which is why I don't think we should be making too many commitments right now."
Julian Callow, Chief European Economist of Barclays Capital

"Strong growth in the second half of the year makes a further easing of the anyway very expansionary ECB policy unnecessary."
Jörg Krämer, Chief Economist of Commerzbank

Appendix 2

Background information

The ECB Shadow Council was founded in 2002 upon an initiative of Handelsblatt, the German business and financial daily. It is an unofficial panel, independent of the ECB/Eurosystem, and comprising fifteen prominent European economists drawn from academia, financial institutions, consultancies and research institutes.

The Shadow Council usually convenes by telephone conference on a monthly basis (though in November it holds a face-to-face meeting). Discussions take place a week before the monthly official ECB Governing Council "policy" meetings, and are intended to formulate an opinion as to what monetary policy decision its members believe that the ECB's Governing Council ought to undertake, both at its forthcoming meeting and also on a three month horizon. Shadow Council members are encouraged to submit their own economic projections for euro area activity and inflation on a monthly basis, which constitute the panel's forecast consensus as published each month.

The Shadow Council's discussions and recommendations differ from surveys of economists concerning the outlook for ECB interest rates because the Shadow Council recommendation expresses the majority view of its' members opinions about what the ECB should do, rather than what they forecast it to do (hence the "normative" views as expressed by Shadow Council members as to what they consider the ECB ought to do, can differ from what they expect the ECB to do). This "normative" perspective can, however, give an early indication of shifts in the balance of opinion in the expert community, as can be seen by comparing the historic recommendations of the Shadow Council against subsequent decisions undertaken by the ECB Governing Council.

Members of the Shadow Council base their recommendations on the ECB's objectives as defined under the EU Treaty, although Shadow Council members do not necessarily adopt exactly the ECB's specific interpretation of its mandate: most Shadow Council members consider that a medium term inflation objective of two percent with a symmetric tolerance band around it would be clearer, more realistic and more appropriate than the definition adopted by the Governing Council, which defines price stability as an inflation rate of "below, but close to, two percent", in the medium term.

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