ECBShadow Council
Expected bond purchase programme will not be a game changer

At the meeting of the Shadow ECB Council on 27 November 2014, it became clear that most members do not expect very much positive impact from the widely expected extension of the ECB’s asset purchases to government bonds.
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Frankfurt am MainSeveral members warned of possible negative long term consequences from the inflation of asset prices produced by such large scale asset purchases. The average growth and inflation forecasts for 2015 and even more so for 2016 of the members of the Shadow Council show an unusually large discrepancy with those of the ECB staff, potentially indicating a need for downward revisions to the latter. One of the 15 members argued for a further significant cut in the main refinancing rate, three members argued for a rate increase.

Inflation and growth forecasts far below ECB projections

Compared to two months ago, the average forecasts for inflation this year and next declined by 0.1 percentage points, each. The first average forecast reading for 2016 is 1.1 percent, 0.3 percentage points below the latest ECB projections. The Shadow Council’s mean forecast for GDP-growth in 2014 and 2015 remained unchanged at 0.1 and 0.5 percentage points below the ECB projections, respectively. The first reading for 2016 is 1.2 percent, an unusually large 0.7 percentage points below the ECB projection. This might imply that the new projections, which are due to be published on 4 December might be lowered significantly.

Shadow Council macroeconomic forecasts

(ECB’s September projections in brackets)

 HICP-InflationGDP-Growth
20140.5 (0.6)0.8 (0.9)
20150.9 (1.1)1.1 (1.6)
20161.1 (1.4)1.2 (1.9)
Contributors: M. Annunziata, E. Bartsch; A. Bosomworth; S. Broyer; J. Cailloux; J. Callow;, J. Henry, J. Krämer, F. Lindner, E. Nielsen

 

Expected bond purchase programme will not be a game changer

Most members share market expectations of a major programme of bond purchases being decided by the ECB during the first quarter of 2015. Few members consider such a programme by itself sufficient to revive bank credit and to lead to satisfying economic performance of the euro area. Many members expressed concern about the search for yield and the inflation of asset prices that large scale quantitative easing would entail. Several remarked on the potential legal problem with regard to the prohibition of monetary financing. A reduction of incentives for governments to reduce budget deficits and to introduce supply-side oriented reforms were also mentioned as potential problems.

Several members suggested that the ECB extend the scope of assets to be bought to corporate bonds, bank loans and even equities before considering buying government bonds. While alternatives to quantitative easing of the envisaged kind were not a focus of this meeting, some members argued, that any easing should be tailored toward the real economy, not financial markets.

The role of the exchange rate as a transmission channel

Depression of the exchange rate of the euro was considered the most effective transmission channel of quantitative easing. However, a few members warned against the idea that depreciation of the exchange rate and the resulting increases in import prices by themselves would help in the fight against deflation. These members argued that imported inflation, unlike inflation created internally, would make the problem of too much debt even worse, at least in the short term, because costs, but not revenue available for debt service, would go up. Thus, only the improvement in price competitiveness vis-à-vis foreign producers would bring the desired benefit. And even to this, one member objected that the current account of the euro area was already showing a large surplus, produced mainly by Germany. Thus, it was argued that differences in competitiveness were the problem, not the level.

 

Discussion about negative deposit rate

A few members argued that it was important to take the deposit rate back up to zero percent from the current minus 0.2 percent, as a negative rate constituted a “QE-tax” on banks. These members argued that it was not in the control of the banking system to reduce its excess reserves if the central bank created those reserves on a large scale by buying assets. However, most members did not share this view. It was objected that the negative deposit rate was helpful in lowering the exchange rate of the euro.

Members’ individual votes on main refinancing rate (currently 0.05%):
MemberAffiliationRate recommendation
José AlzolaThe Observatory Groupunchanged
Marco AnnunziataGeneral Electricunchanged
Elga BartschMorgan Stanleyunchanged
Andrew BosomworthPimcohike to 0,15%
Sylvain BroyerNatixisunchanged
Willem BuiterCitigroupcut to -0.25
Jacques CaillouxNomuraunchanged
Julian CallowCatalyst Economicsunchanged
Eric ChaneyAxaunchanged
Janet HenryHSBCunchanged
Merijn KnibbeWageningen Universityunchanged
Fabian LindnerIMKunchanged
Jörg KrämerCommerzbankhike to 0,30%
Erik NielsenUnicreditunchanged
Richard WernerUniversity Southamptonhike to 0,55%

 Frankfurt, 1. December, 2014

Norbert Häring (Non-voting Chairman)

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Expected bond purchase programme will not be a game changer

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Background information

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