Konjunktur
Minutes of Earlier Meetings

Statement of the ECB Shadow Council, adopted October 31


The ECB Shadow Council recommends with a majority of 15 votes that the ECB Governing Council leave rates unchanged at its next meeting and advises against expressing an inclination toward higher rates. The Shadow Council judges that, since the last meeting a month ago, the downside risks to economic activity have increased more than the upside risks to inflation.

Prospects for growth and inflation


The prevailing view at the ECB Shadow Council is that downside risks to economic activity have increased more since last month than the upside risks to inflation. A continuation of the declines in business and consumer sentiment indicators, higher oil prices, a higher euro exchange rate, and signs of a deepening slump in the US real estate market are all indicators of increased downside risks to growth. The ECB Shadow Council also notes that the situation in European money markets has improved only slightly. Three-month Euribor interbank rates trade at around 4.60%, still almost 40 basis points above their pre-crisis level. The loan manager survey of the ECB showed a tightening of credit standards, which is likely to continue and dampen the economy to some extent.

On the other hand the Shadow Council notes that any decline in economic dynamics would take place from a fairly elevated level of production, orders and business sentiment. Furthermore, many important emerging markets and oil exporting countries seem likely to keep growing strongly, thus providing an ongoing source of export demand.

Despite an increase of the annual euro area HICP inflation rate to 2.6 percent in October, the Shadow Council’s prevailing assessment of the outlook for inflation did not change much since a month earlier. A stronger euro and the expected deceleration of growth combined with moderate wage increases are expected to contribute to reduced inflationary pressures going forward. Still, the HICP inflation rate is expected to remain elevated at or above 2 ½ percent into the first months of 2008.

Shadow Council members’ forecasts for growth have become a little less optimistic since last month, while inflation forecasts have remained unchanged on average. Three members lowered their growth forecast for 2008, one did so for 2007. One member slightly raised their inflation forecast for 2008. On average, Shadow Council members now expect growth to slow down to 2.6 percent this year (unchanged) and to 1.9 percent in 2008 (down from 2.0 percent). Inflation is forecast at 2.0 percent this year and next (unchanged). However, uncertainty regarding the outlook for growth and inflation is still judged unusually high. Based on current information most members judge that the risk of a stronger than expected slowdown of the economy dominates the risk of a significant acceleration of inflation to an even greater extent than a month ago.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20062.22.8
20072.0 (2.0)2.6 (2.6)
20082.0 (2.0)1.9 (2.0)

Forecasters: J. Alzola; L. Buttiglione; J. Cailloux; J. Callow; S. King; J. Escrivá; J. Fels; M. Heise; T. Mayer; V. Riches-Flores; J.M. Six


Eight forecasters have assumed that the ECB key rate will remain at 4.0 percent for the next six months, three (corrected) assumed a rate cut to 3.75 percent.


Monetary policy stance


The ECB’s key rate of 4.0 percent is judged appropriate as long as there are no clear indications that the downside risks to growth do materialize to a significant extent - otherwise, a rate cut might be called for. However, in view of the elevated current inflation rate the Shadow Council sees limited room for the ECB to cut rates pre-emptively, without being reasonably sure that the downside risks to activity will indeed materialise. The Shadow Council does not deem it advisable for the ECB to express an inclination to raise its key interest rate further.

Other views


A sizeable minority disagreed with the view that growth risks had increased more than inflation risks and held that both had increased at more or less the same pace. Some members of this group stressed the primary mandate of the ECB to safeguard price stability, implying that risks to growth and to price stability should not be considered to be of equal importance.

Members who voted for a recommendation of a rate cut stressed the accumulation of downside risks to the economy and voiced doubt that demand from emerging markets could buffer the euro area economy against a decline in export demand elsewhere. They reasoned that emerging market economies would not remained unaffected of a US slowdown and that the share of Eurozone exports going to countries like China and Russia was still relatively small.

Some members would like the ECB to do more to ease tensions in the money market’s medium term segment, by increasing the size and frequency of three-month tender operations.

One holds that a rate hike will be necessary if money and credit growth should not slow down significantly and swiftly, arguing that excessive money and credit growth might destabilize financial markets and/or stoke inflation.

Vote


15 members voted for the recommendation to leave rates unchanged at the next ECB meeting November 8. Four members voted in favour of a rate cut by 25 basis points.

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote
Thorsten PolleitECB-Observer, Frankfurtno change
Joachim FelsMorgan Stanley, Londoncut 25 bp
Willem BuiterLondon School of Economics and Goldman Sachsno change
Thomas MayerDeutsche Bank, Londonno change
Daniel GrosCenter of European Policy Studies (CEPS), Brusselsno change
Stephen KingHSBC, Londonno change
Giancarlo CorsettiEuropean University Institute, Florenceno change
Luigi ButtiglioneFortress, Londonno change
Jacques CaillouxRoyal Bank of Scotland, Londonno change
Josè AlzolaCitigroup, Londonno change
Jean-Michel SixStandard & Poor's, Londonno change
José Luis EscriváBBVA, Madridno change
Véronique Riches-FloresSociété Générale, Pariscut 25 bp
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
Gernot NerbIfo-Institute, Munichno change
Julian CallowBarclays Capital, Londonno change
Agnès Bénassy-QuéréCEPII, Pariscut 25 bp
Charles WyploszGraduate Institute of International Studies, Genevano change
Angel UbideTudor Investment Corporation, Washington D.C.cut 25 bp

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates. Members shown on a dark background have in the past voted dowishly, in relation to the ECB's actual interest rate decisions, the others have voted more hawkishly.


Friday, November 2, 2007
Norbert Haering, Frankfurt Statement of the ECB Shadow Council, adopted September 27, 2007

The ECB Shadow Council recommends that the ECB leave its key interest rate on hold at the next policy meeting on October 4. No bias in favor of higher rates should be expressed at the ECB press conference. Many members of the Shadow Council see a high probabiltiy that a rate cut might be needed soon.

Prospects for growth and inflation


The Shadow Council notes that more than a month after the credit bubble burst the situation in European money markets has not improved. Three-month Euribor interbank rates trade at around 4.75%, some 50 basis points above their pre-crisis level. In normal times, this would be consistent with an official refinancing rate of 4.5 percent, rather than the current 4.0 percent. The increase in money market interest rates, higher risk spreads and the appreciation of the euro have led to less favourable financing conditions and reduced price competitiveness of Euro area producers. Declines in business and consumer surveys suggest that the credit crunch of the financial sector is beginning to affect the economy.

On the other hand it is noted that any decline in economic dynamics would take place from a fairly elevated level of production, orders and business sentiment. Furthermore, many important emergent markets and oil exporting countries seem likely to keep growing strongly, thus providing an ongoing source of export demand.

As regards inflation, the stronger Euro and the expected deceleration of growth are likely to reduce price pressures going forward. The headline inflation rate is expected to rise above two percent in the coming months, but with underlying measures and wages well under control it is expected to go back down to slightly below two percent in the course of 2008. Inflation expectations seem well anchored.

On average, Shadow Council members expect growth to slow down to 2.6 percent this year and to 2.0 percent in 2008. Inflation is forecast at 2.0 percent this year and next. However, uncertainty regarding the outlook for growth and inflation is currently unusually high. Based on current information most members judge that the risk of an excessive slowdown of the economy clearly dominates the risk of a significant acceleration of inflation.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20062.22.8
20072.0 (2.0)2.6 (2.6)
20082.0 (1.9)2.0 (2.1)

Forecasters: J. Alzola; L. Buttiglione; J. Cailloux; J. Callow; S. King; J. Escrivá; J. Fels; M. Heise; T. Mayer; V. Riches-Flores; J.M. Six


All forecasters have assumed that the ECB key rate will remain at 4.0 percent for the next six months.


Monetary policy stance


The ECB’s key rate of 4.0 percent is judged appropriate as long as there are no indications that the downside risks to growth will materialize to a significant extent. Otherwise a rate cut might soon be called for in the opinion of a large number of members. There is a strong consensus in the Shadow Council that it is not advisable for the ECB to express an inclination to raise its key interest rate further.

Money market operations


The ECB Shadow Council broadly supports the approach of the ECB with regard to alleviating the tensions in the money market. The ECB is encouraged to continue to provide a generous amount of liquidity to the market, including for term (three month) financing. The Shadow Council notes that the persistence of elevated Libor rates is a sign that the lending behaviour of banks has fundamentally shifted and that the money market is not functioning in a normal, liquid fashion. Therefore, a stiff penalty rate for the provision of additional liquidity is not called for in the opinion of most members of the Shadow Council.

. Other views

Thorsten Polleit and Julian Callow disagree with the statement that the risks to growth clearly outweigh the risk of an acceleration of inflation. Polleit cites the rising gold price as potential evidence that inflation expectations might be on the rise. Callow stresses the mitigating effect of strong global demand on downside risks to growth and the upside risks to inflation stemming from high commodity prices.

Joachim Fels judges that monetary policy has already turned restrictive, with three-month Euribor rates standing some 75 basis points above his estimate of the neutral, or natural, rate of four percent. .He expects that higher short rates, tighter bank lending standards, a stronger euro and a slowing US consumer are likely to push euro area GDP growth below its trend pace in the coming quarters. He also recommends that the ECB lean against the wind of the euro appreciation. Therefore he voted for a recommendation to cut the key rate by 25 basis points. Véronique Riches-Flores agrees with his more pessimistic view of economic perspectives and shares his preference for a rate cut.

Willem Buiter disagrees with the majority view that the ECB should provide extra liquidity to the money market without imposing a penalty rate. He would charge more than the 100 basis points premium of the Marginal Lending Facility over the policy rate if the borrower is offering highly illiquid collateral.

Vote


17 members voted for the recommendation to the ECB to leave rates unchanged at its next meeting on October 4. Two members voted in favour of a rate cut by 25 basis points.

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

no change

Thorsten PolleitECB-Observer, Frankfurtno change
Joachim FelsMorgan Stanley, Londoncut 25 bp
Willem BuiterLondon School of Economics and Goldman Sachsno change
Thomas MayerDeutsche Bank, Londonno change
Daniel GrosCenter of European Policy Studies (CEPS), Brusselsno change
Giancarlo CorsettiEuropean University Institute, Florenceno change
Stephen KingHSBC, Londonno change
Luigi ButtiglioneFortress, Londonno change
Véronique Riches-FloresSociété Générale, Pariscut 25 bp
Jacques CaillouxRoyal Bank of Scotland, Londonno change
Josè AlzolaCitigroup, Londonno change
Jean-Michel SixStandard & Poor's, Londonno change
José Luis EscriváBBVA, Madridno change
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
Gernot NerbIfo-Institute, Munichno change
Agnès Bénassy-QuéréCEPII, Parisno change
Julian CallowBarclays Capital, Londonno change
Charles WyploszGraduate Institute of International Studies, Genevano change
Angel UbideTudor Investment Corporation, Washington D.C.no change

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates. Members shown on a dark background have in the past voted dowishly, in relation to the ECB's actual interest rate decisions, the others have voted more hawkishly.


thursday, September 27, 2007
Norbert Haering, Frankfurt Summary minutes of the meeting on August 30, 2007

The ECB Shadow Council recommended, with a majority of 18 votes in favour, that the ECB Governing Council leave its key interest rate unchanged at 4 percent at its forthcoming policy meeting on September 6. One member favoured a rate hike to 4.25 percent.. The ECB has last raised its key interest rate in June.

There was a strong consensus within the Shadow Council that the current crisis in the credit market has significantly increased downside risks to growth. A number of members went further to say that it was likely, that growth would be dampened. This was reflected in downside revisions of growth and – to a lesser extent – inflation forecasts. The average growth forecast for 2008, of the ten members who regularly provide these forecasts, decreased from 2.3 to 2.1 Percent. The inflations forecast for 2008 went down to 1.9 percent. Underlying most of these forecasts was the assumption that the ECB key rate would stay at 4 percent for the next six months.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20062.22.8
20072.0 (2.0)2.6 (2.7)
20081.9 (2.0)2.1 (2.3)

Forecasters: J. Alzola; L. Buttiglione; J. Cailloux; J. Callow; S. King; J. Escrivá; J. Fels; M. Heise; T. Mayer; V. Riches-Flores; J.M. Six


All members agreed that the current crises in credit markets had substantially weakened the case for higher ECB rates. José Luis Escrivá, however, who recommended a rate hike to 4.25 percent, argued that such a hike would enable the ECB to convincingly communicate a prospective end to the current rate hike cycle. He felt that such a course of action would be best suited to keep market rates low.

All other members except Thorsten Polleit agreed with Mr. Escrivá that the ECB should keep the rate outlook completely open, refraining from communicating any bias toward higher rates. There was a very strong consensus that inflation prospects signalled no urgent need, if any, to raise interest rates further quickly. Therefore, almost all members judged that inflation risks from holding rates now were far smaller than the risk that a rate hike might excessively slow an economy already grappling with the consequences of the ongoing financial crisis. Waiting to see how long the liquidity crunch in the money markets would last and what the consequences for the economy might be, was considered the better option. Mr Polleit did not vote for a rate hike for the first time since November 2004 on the grounds that the current upheaval in credit markets would likely result in significantly tighter lending conditions, slowing down money and credit creation, a development he said he would welcome.

Several members advocated an overhaul of the ECB’s communication policy, criticizing the policy of (conditional) pre-commitments by use of code-words. These members described the events of the last weeks as “embarrassing” for the ECB. President Jean-Claude Trichet had practically per-announced a rate hike for the next policy meeting at the last press conference on August 3 by use of the expression “strong vigilance”, but later distanced himself from this message in light of the financial market turbulences. Many members favoured an approach of talking about the direction of risks to price stability, but without indicating a time frame or probabilities for policy reactions to these risks.

The ECB’s recent efforts to provide banks with extra liquidity to make up for the drying up of money markets, were applauded in general but criticised in detail. Willem Buiter was particularly critical. He argued that the right policy was to lend freely at a punitive rate and to help keep important financial markets liquid. He criticised the ECB’s policy of providing almost unlimited overnight credit for an interest rate around the minimum bid rate as a subsidy to those banks who did not need help, while failing to help those with a lack of suitable collateral to borrow against from the ECB. Rather than providing credit cheaply, Mr. Buiter urged the ECB to help ease the credit crunch by expanding the range of acceptable collateral. Asset backed short term securities, which are currently very hard to sell, could thus be used to refinance. Mr. Buiter’s suggestions were supported by many members of the Shadow Council. Only José Luis Escrivá cautioned that the ECB was right to insist on top quality collateral to protect tax payers’ interests.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

no change

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurtno change
Joachim FelsMorgan Stanley, Londonno change
Willem BuiterLondon School of Economics and Goldman Sachsno change
Thomas MayerDeutsche Bank, Londonno change
Daniel GrosCenter of European Policy Studies (CEPS), Brusselsno change
Giancarlo CorsettiEuropean University Institute, Florenceno change
Stephen KingHSBC, Londonno change
Luigi ButtiglioneFortress, Londonno change
Véronique Riches-FloresSociété Générale, Parisno change
Jacques CaillouxRoyal Bank of Scotland, Londonno change
Josè AlzolaCitigroup, Londonno change
Jean-Michel SixStandard & Poor's, Londonno change
José Luis EscriváBBVA, Madridhike 0.25
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
Gernot NerbIfo-Institute, Munichno change
Agnès Bénassy-QuéréCEPII, Parisno change
Julian CallowBarclays Capital, Londonno change
Charles WyploszGraduate Institute of International Studies, Genevano change
Angel UbideTudor Investment Corporation, Washington D.C.no change

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates. Members shown on a dark background have in the past voted dowishly, in relation to the ECB's actual interest rate decisions, the others have voted more hawkishly.


Friday, August 31, 2007
Norbert Haering, Frankfurt

Summary Minutes of the Meeting on July 26

The ECB Shadow Council recommended, with a majority of 16 votes in favour, that the ECB Governing Council leave its key interest rate unchanged at 4 percent at its forthcoming policy meeting on August 2. Three members favoured a rate hike to 4.25 percent, the same number as a month earlier. The ECB last raised its key interest rate in June.

This was the first time since the beginning of the current tightening cycle in December 2005, that two months after the last rate hike, support for an immediate further hike was so low and did not increase compared to the previous month. However, this does not seem to imply that support for further tightening has dissipated. Of the 16 members voting for a recommendation of unchanged rates at least eight hold the view that rates will probably have to be raised somewhat further.

Regarding growth prospects of the Eurozone economy, the predominant view was that there would be some moderation of growth after the strong expansion in the last few quarters, down to rates around or slightly above the growth potential. The eleven members who regularly provide detailed economic forecasts on average foresee a growth rate of 2.7 percent this year, slightly up from a month ago. The average forecast for 2008 went up a notch to 2.3 percent, while inflation forecasts remained unchanged at 2.0 percent this year and 1.9 percent for next year. These forecasts were produced under the assumptions that the ECB would raise its key rate to 4.25 percent within the next three months and that there was a 50 percent chance of a hike to 4.5 percent by year-end.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20062.22.8
20072.0 (2.0)2.7 (2.6)
20082.0 (1.9)2.3 (2.3)

Forecasters: J. Alzola; L. Buttiglione; J. Cailloux; J. Callow; S. King; J. Escrivá; J. Fels; M. Heise; T. Mayer; V. Riches-Flores; J.M. Six


The discussion focused on risks for the Eurozone economy stemming from the recent appreciation of the euro, increased oil prices and recent developments of financial markets. High oil prices were occasionally mentioned as a risk factor but did not gain prominence in the discussion. There was a widely held view that high prices resulted from strong global activity levels and demand rather than supply disruptions. Regarding the euro appreciation the majority view was that the exchange rate has lost significance for the economy due to monetary union. It was noted that the economy was so far coping very well. Several members argued that the depreciation of the dollar was a very welcome element of global rebalancing. Several members mentioned that the appreciation in trade weighted real terms over the last two years has been very modest. A large minority, however, warned against underestimating the impact of a strong currency, describing the euro as clearly overvalued. They cited econometric evidence showing that the exchange rate had a strong impact on the economy, even stronger than interest rate changes. They also warned of the tendency of the market to overshoot and thus argued against raising interest rates precisely at a time of heightened volatility with a high danger of an overshoot. Several members said the ongoing correction in credit markets was more significant than the euro appreciation. Increasing risk premiums were generally regarded as normalization, but several members judged that the size of the movements in certain markets bordered on the disorderly.

The consensus view emerged that recent developments in financial markets should prompt the ECB to proceed very carefully with the limited further tightening, which a majority of Shadow Council members still regards as appropriate.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

no change

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.25
Joachim FelsMorgan Stanley, Londonno change
Willem BuiterLondon School of Economics and Goldman Sachshike 0.25
Thomas MayerDeutsche Bank, Londonno change
Daniel GrosCenter of European Policy Studies (CEPS), Brusselsno change
Giancarlo CorsettiEuropean University Institute, Florenceno change
Stephen KingHSBC, Londonhike 0.25
Luigi ButtiglioneRubicon, Londonno change
Véronique Riches-FloresSociété Générale, Parisno change
Jacques CaillouxRoyal Bank of Scotland, Londonno change
Josè AlzolaCitigroup, Londonno change
Jean-Michel SixStandard & Poor's, Londonno change
José Luis EscriváBBVA, Madridno change
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
Gernot NerbIfo-Institute, Munichno change
Agnès Bénassy-QuéréCEPII, Parisno change
Julian CallowBarclays Capital, Londonno change
Charles WyploszGraduate Institute of International Studies, Genevano change
Angel UbideTudor Investment Corporation, Washington D.C.no change

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates. Members shown on a dark background have in the past voted dowishly, in relation to the ECB's actual interest rate decisions, the others have voted more hawkishly.


Friday, June 27, 2007
Norbert Haering, Frankfurt;   Jacques Cailloux, London

Summary Minutes of the Meeting on June 28

The ECB Shadow Council recommended, with a majority of 16 votes in favour, that the ECB Governing Council leave its key interest rate unchanged at 4 percent at its forthcoming policy meeting on July 5. Three members favoured a rate hike to 4.25 percent. The ECB had last raised its key interest rate in June 2007.

The Shadow Council discussed the degree of slack in the Eurozone economy. There were two camps of similar size, each concentrating on different indicators of resource utilization. One camp focused on capacity utilization in industry, which, it was noted, had risen to a level even beyond the peak of the boom year 2000. The other camp pointed to subdued wage growth and labour costs, arguing that there must be some slack left in the economy, if there is not more cost pressure from labour. Moreover, the latter group argued that any shortages in supply could be alleviated easily through higher imports.

The opposing camp warned against putting too much stock on the development of labour costs, arguing that the “globalization of labour costs” was keeping wage growth down. High demand could produce price pressures, even in the absence of excessive wage growth as it could lead to higher mark-ups over labour costs and higher non-labour costs, thus creating inflation even without excessive wage growth. Regarding growth prospects of the Eurozone economy, the predominant view was that there would be some moderation of growth after the strong expansion in the last few quarters, down to rates that would leave overall capacity utilization of the economy more or less constant.

Those who diagnosed some remaining slack in the economy therefore did not see a need to hike rates further, while the other camp either proposed a rate hike or expressed a predisposition to vote for a hike recommendation in the months to come. Several members also mentioned high growth rates of money and credit as an argument to tighten monetary policy further.

The eleven members who regularly provide detailed economic forecasts on average foresee a growth rate of 2.6 percent this year, unchanged from a month ago. The average forecast for 2008 went up a notch to 2.3 percent, while inflation forecasts remained unchanged at 2.0 percent this year and 1.9 percent for next year. These forecasts were produced under the assumptions that the ECB would raise its key rate to 4.25 percent within the next three months and that there was a 50 percent chance of a hike to 4.5 percent by year-end.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20062.22.8
20072.0 (2.0)2.6 (2.6)
20081.9 (1.9)2.3 (2.2)

Forecasters: J. Alzola; L. Buttiglione; J. Cailloux; J. Callow; S. King; J. Escrivá; J. Fels; M. Heise; T. Mayer; V. Riches-Flores; J.M. Six


New members: The ECB Shadow Council welcomed three new members: José Luis Alzola, Director of Research at Citigroup, Jacques Cailloux, European Chief Economist at Royal Bank of Scotland, and Jean-Michel Six, European Chief Economist at Standard & Poor’s, all three based in London. They replace outgoing members Philip Lane and André Sapir and Marie Diron, who is on maternity leave from her position at Brevan Howard and from the ECB Shadow Council.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

no change

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.25
Joachim FelsMorgan Stanley, Londonno change
Willem BuiterLondon School of Economics and Goldman Sachshike 0.25
Thomas MayerDeutsche Bank, Londonno change
Daniel GrosCenter of European Policy Studies (CEPS), Brusselsno change
Giancarlo CorsettiEuropean University Institute, Florenceno change
Stephen KingHSBC, Londonhike 0.25
Luigi ButtiglioneRubicon, Londonno change
Véronique Riches-FloresSociété Générale, Parisno change
Jacques CaillouxRoyal Bank of Scotland, Londonno change
Josè AlzolaCitigroup, Londonno change
Jean-Michel SixStandard & Poor's, Londonno change
José Luis EscriváBBVA, Madridno change
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
Gernot NerbIfo-Institute, Munichno change
Agnès Bénassy-QuéréCEPII, Parisno change
Julian CallowBarclays Capital, Londonno change
Charles WyploszGraduate Institute of International Studies, Genevano change
Angel UbideTudor Investment Corporation, Washington D.C.no change

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates. Members shown on a dark background have in the past voted dowishly, in relation to the ECB's actual interest rate decisions, the others have voted more hawkishly.


Friday, June 29, 2007
Norbert Haering, Frankfurt;   Daniel Gros, Brussels

Summary Minutes of the Meeting of the ECB Shadow Council on May 31, 2007


The ECB Shadow Council recommended, with a majority of 18 votes in favour, that the ECB Governing Council raise its key interest rate to four percent at its forthcoming policy meeting on June 6. One member favoured a recommendation of an unchanged key rate, instead.

It was generally agreed that business cycle indicators and GDP growth in the first quarter had continued to surprise on the upside, which was taken as a strong sign that the economy was weathering the euro appreciation and the large German VAT-hike quite well. There was a marked upgrading of growth projections for this year, caused by higher than expected growth in the first quarter. The average forecast of members went up to 2.6 percent from 2.3 percent, which is only slightly above ECB projections from March. The average forecast for 2008 remained unchanged at 2.2 percent. The average inflation forecast of Shadow Council members for this year went up a notch to two percent and remained unchanged at 1.9 percent for 2008.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20062.22.8
20072.0 (1.9)2.6 (2.3)
20081.9 (1.9)2.2 (2.2)

Forecasters: L. Buttiglione; J. Callow; M. Diron; S. King; J. Escrivá; J. Fels; M. Heise; T. Mayer; V. Riches-Flores


Most members judged the current rate of 3.75 percent to still be slightly on the side of stimulating the economy. They argued that some more “normalization” of the rate level was in order, given strong growth and favourable growth prospects. There was general agreement about the absence of imminent threats to price stability, given stable unit labour costs in the Euro area.

Joachim Fels, who preferred a recommendation of unchanged rates warned, that higher growth forecasts were just based on higher current growth and an extrapolation of recent trends. He expects a marked deceleration of the economy in the second half of the year, brought about by the lagged effect of higher ECB rates and long term yields and of the Euro appreciation. Several members expressed some sympathy with this view, but held, that there were not enough indications, yet, of an impending slowdown.

About a third of the members explicitly voiced the opinion that the key rate will have to be raised above four percent upon current information. A smaller group said that the impending rate hike to four percent, which is generally conceived to be already pre-announced by the ECB, would most likely be the last they would support in the current cycle.

The Shadow Council discussed the usefulness of the monetary pillar of the ECB. There was wide consensus that monetary indicators sometimes contain important information and should be analysed by the central bank. The majority view was that the information content varied with time and thus assigning monetary indicators the role of a separate pillar of the strategy amounted to excessive emphasis much of the time. Some members argued for broadening the scope of the monetary pillar to a comprehensive analysis of financial developments with a focus on financial risks. Others defended the monetary pillar as a potential source of early warning signals that something “was going wrong”.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

hike 0.25

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.25
Joachim FelsMorgan Stanley, Londonno change
Thomas MayerDeutsche Bank, Londonhike 0.25
Willem BuiterLondon School of Economics and Goldman Sachshike 0.25
Daniel GrosCenter of European Policy Studies (CEPS), Brusselshike 0.25
André SapirUniversité Libre de Bruxelles and Bruegelhike 0.25
Stephen KingHSBC, Londonhike 0.25
Véronique Riches-FloresSociété Générale, Parishike 0.25
Luigi ButtiglioneRubicon, Londonhike 0.25
Giancarlo CorsettiEuropean University Institute, Florencehike 0.25
Marie DironBrevan Howard, Londonhike 0.25
José Luis EscriváBBVA, Madridhike 0.25
Michael HeiseDresdner Bank / Allianz, Frankfurthike 0.25
Philip LaneTrinity College Dublinhike 0.25
Gernot NerbIfo-Institute, Munichhike 0.25
Agnès Bénassy-QuéréCEPII, Parishike 0.25
Julian CallowBarclays Capital, Londonhike 0.25
Charles WyploszGraduate Institute of International Studies, Genevahike 0.25
Angel UbideTudor Investment Corporation, Washington D.C.hike 0.25

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates. Members shown on a dark background have in the past voted dowishly, in relation to the ECB's actual interest rate decisions, the others have voted more hawkishly.


Friday, June 1, 2007
Norbert Haering, Frankfurt

Summary Minutes of the Meeting of the ECB Shadow Council on May 3, 2007


The ECB Shadow Council recommended, with a majority of 13 votes in favour, that the ECB Governing Council leave its key interest rate unchanged at 3.75 percent at its forthcoming policy meeting on May 10. Six members favoured a recommendation of an increase to four percent, instead.

Most market participants perceive the ECB as having clearly signalled an increase to four percent in June. In keeping with standard practice of the Shadow Council, members disregarded market expectations created by the ECB when issuing their rate recommendations.

There was an extensive discussion about the role that the recent appreciations of the euro schould play in setting the key interest rate. There was widespread agreement that the appreciation so far has not been dramatic enough to suggest an end to the ECB’s policy of gradual monetary tightening. It was noted that business cycle indicators had continued to surprise on the upside, which was taken as a strong sign that the economy was weathering the euro appreciation quite well. Members argued that growth expectations have so far not been dented by the euro appreciation and that there was even a good chance that the ECB would have to revise up its growth projections in June.

Indeed, growth expectations of the members of Shadow Council for 2007 remained unchanged at 2.3 percent, which is slightly below ECB projections from March. The average forecast for 2008 increased slightly to 2.2 percent. The average inflation forecast of Shadow Council members remained at slightly below two percent in both years.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20062.22.8
20071.9 (1.8)2.3 (2.3)
20081.9 (1.9)2.2 (2.1)

Forecasters: L. Buttiglione; J. Callow; M. Diron; S. King; J. Escrivá; J. Fels; M. Heise; T. Mayer; V. Riches-Flores


While a number of members criticized the policy of the ECB of pre-announcing rate hikes as overly inflexible, the majority thinks that raising rates around June is indeed a reasonable policy, if judged upon currently available information. Of the 13 members who favoured no change in May, most held the view that at least one more interest rate hike in the near future would be warranted.

Beyond that, however, there was disagreement over the degree of attention the ECB should pay to currency movements. A significant minority suggested that the ECB should exclusively consider the exchange rate as an input into forecasts for growth and inflation and judged the impact of the euro on the Eurozone economy to be rather moderate. This group argued that the euro zone is a large and fairly closed economy, not dissimilar to the US. They conjectured that the emphasis that many place on the exchange rate might be a legacy of the pre-euro past.

This view was challenged on the grounds that the export share of the euro zone was significantly higher than the one of the US. Furthermore it was noted that the US was different because most international trade was invoiced in their home currency.

There was no consensus either on whether the recent appreciation of the euro has gone beyond what fundamentals would suggest. A few participants argued that the ECB should not support further divergence of the euro from its fundamental value, whereas a larger group held that the euro appreciation is well grounded whatever the European monetary policy.

However, the majority worried that an overly tight monetary policy, which did not take account of the exchange rate, might push the Euro to a level at which it would jeopardize the ongoing economic expansion. It was noted that the dampening effect of an exchange rate appreciation has a time lag that might even have increased recently, due to improved hedging. Most members of this group hold the view that the ECB should put its tightening cycle on hold after the next rate increase, if the euro should stay strong or even appreciate further.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

no change

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.25
Joachim FelsMorgan Stanley, Londonno change
Thomas MayerDeutsche Bank, Londonno change
Willem BuiterLondon School of Economics and Goldman Sachshike 0.25
Daniel GrosCenter of European Policy Studies (CEPS), Brusselshike 0.25
André SapirUniversité Libre de Bruxelles and Bruegelhike 0.25
Stephen KingHSBC, Londonhike 0.25
Véronique Riches-FloresSociété Générale, Parisno change
Luigi ButtiglioneRubicon, Londonno change
Giancarlo CorsettiEuropean University Institute, Florencehike 0.25
Marie DironBrevan Howard, Londonno change
José Luis EscriváBBVA, Madridno change
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
Philip LaneTrinity College Dublinno change
Gernot NerbIfo-Institute, Munichno change
Agnès Bénassy-QuéréCEPII, Parisno change
Julian CallowBarclays Capital, Londonno change
Charles WyploszGraduate Institute of International Studies, Genevano change
Angel UbideTudor Investment Corporation, Washington D.C.no change

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates. Members shown on a dark background have in the past voted dowishly, in relation to the ECB's actual interest rate decisions, the others have voted more hawkishly.


Friday, May 4, 2007
Norbert Haering, Frankfurt,   Agnès Bénassy-Quéré, Paris

Recommendation for the ECB meeting on April 12

The ECB Shadow Council recommended, with a majority of 16 votes in favour, that the ECB Governing Council leave its key interest rate unchanged at 3.75 percent at its forthcoming policy meeting on April 12. Two members favoured a recommendation of a rate increase, instead, one by a quarter point and one by half a point. One vote was not available. In departure from the usual procedure the vote was taken via e-mail.

For the third consecutive month, growth expectations of Shadow Council members have been revised upwards, while inflation forecasts have been revised down. As regards 2007 the average forecasts closely match ECB projections from March, while for 2008 it is significantly below the midpoint of the ECB projections for growth and slightly below for inflation.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20062.22.8
20071.8 (1.9)2.3 (2.2)
20081.9 (1.9)2.1 (2.1)

Forecasters: L. Buttiglione; J. Callow; M. Diron; S. King; J. Escrivá; J. Fels; M. Heise; T. Mayer; V. Riches-Flores


At a time when financial markets have mostly discounted a further ECB rate hike to four percent by June, only a good third of Shadow Council members expressed a clear bias in favour of higher rates. Another good third of members explicitly declared the absence of a bias in either direction. The others expressed a slight upward bias.

Members’ comments revealed that many feel that the external environment for the euro area economy has become less favourable or at least more uncertain. The main concern war the slowdown in the US real estate market. However, there was no consensus on how strongly this would effect the wider US economy and the euro area.

The current wage round was perceived by most members as having proceeded without major unfavourable surprises so far.

Members`individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

no change

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.5
Joachim FelsMorgan Stanley, Londonno change
Thomas MayerDeutsche Bank, Londonno change
Willem BuiterLondon School of Economics and Goldman Sachshike 0.25
Daniel GrosCenter of European Policy Studies (CEPS), Brusselsno change
André SapirUniversité Libre de Bruxelles and Bruegelno change
Stephen KingHSBC, Londonno change
Véronique Riches-FloresSociété Générale, Parisno change
Luigi ButtiglioneRubicon, Londonno change
Giancarlo CorsettiEuropean University Institute, Florencen/a
Marie DironBrevan Howard, Londonno change
José Luis EscriváBBVA, Madridno change
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
Philip LaneTrinity College Dublinno change
Gernot NerbIfo-Institute, Munichno change
Agnès Bénassy-QuéréCEPII, Parisno change
Julian CallowBarclays Capital, Londonno change
Charles WyploszGraduate Institute of International Studies, Genevano change
Angel UbideTudor Investment Corporation, Washington D.C.no change

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates. Members shown on a dark background have in the past voted dowishly, in relation to the ECB's actual interest rate decisions, the others have voted more hawkishly.


Friday, March 30, 2007
Norbert Häring, Frankfurt

Summary Minutes of the Meeting of the ECB Shadow Council on March 1, 2007

The ECB Shadow Council recommended, with a majority of 14 votes in favour, that the ECB Governing Council raise its key interest rate by a quarter point to 3.75 percent at its forthcoming policy meeting on March 8. Five members favoured a recommendation of unchanged rates, instead. Two of the members voting for higher rates would have preferred a larger rate increase to 4.0 percent. The ECB last raised its key interest rate in December to 3.5 percent. Last month , the Shadow Council had already recommended a rate rise with a slim majority, while the ECB had left rates unchanged.

Members grew more confident about inflation prospects and about growth prospects. The nine members who regularly submit detailed economic projections expect to be below the ECB’s stability threshold of two percent (this year and next. Expectations for growth have improved further to 2.2 percent in 2007 and 2.1 percent 2008.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20062.22.8 (2.7)
20071.9 (2.0)2.2 (2.0)
20081.9 (1.9)2.1 (2.0)

Forecasters: L. Buttiglione; J. Callow; M. Diron; S. King; J. Escrivá; J. Fels; M. Heise; T. Mayer; V. Riches-Flores


The majority in favour of a rate hike argued that relatively strong growth made it likely that the negative output gap in the euro area had closed or would soon be closing, leading to more inflation pressure through higher wages. The majority deemed it important for the central bank to tighten monetary policy already in anticipation of this expected development. It was stressed that the consensus forecasts were derived under the working assumption that the ECB would hike rates further to 3.75 percent or four percent. Therefore, it was argued by proponents of a rate hike that benign inflation and growth forecasts did not qualify as an argument against the need for a rate hike. Continued strong money and credit growth was also cited as an argument for higher rates by several members.

Members of the minority perceived the risk or even held the expectation that growth would slow down significantly soon, removing the need for ECB action to cool down the economy. The strong euro, which might rise further, signs of a cooling of the external environment and the uncertain effects of the German VAT hike were cited in support of this view. Members of the majority were mostly not convinced. It was argued that one month would not make a big difference regarding available information and one should not wait for ever. Rather, it was argued, the ECB should be ready to reverse course if the economy developed in an unexpected and unfavourable way. One member argued that not hiking rates in the face of such strong growth would send a confusing signal ahead of the upcoming wage negotiations.

There was a significant bias in the membership to think that rates will probably have to be raised beyond 3.75 percent in the near term. Of those membes who argued for a rte hike at the next ECB meeting, eight members expressed a strong inclination to push for further rate hikes.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

hike 0.25

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.5
Joachim FelsMorgan Stanley, Londonno change
Thomas MayerDeutsche Bank, Londonhike 0.25
Daniel GrosCenter of European Policy Studies (CEPS), Brusselshike 0.25
Willem BuiterLondon School of Economics and Goldman Sachshike 0.5
André SapirUniversité Libre de Bruxelles and Bruegelhike 0.25
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
Luigi ButtiglioneRubicon, Londonhike 0.25
Stephen KingHSBC, Londonhike 0.25
Giancarlo CorsettiEuropean University Institute, Florencehike 0.25
Marie DironBrevan Howard, Londonhike 0.25
Véronique Riches-FloresSociété Générale, Parishike 0.25
Gernot NerbIfo-Institute, Munichno change
José Luis EscriváBBVA, Madridhike 0.25
Julian CallowBarclays Capital, Londonno change
Philip LaneTrinity College Dublinhike 0.25
Agnès Bénassy-QuéréCEPII, Parisno change
Charles WyploszGraduate Institute of International Studies, Genevahike 0.25
Angel UbideTudor Investment Corporation, Washington D.C.hike 0.25

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates.


Friday, March 2, 2007
Norbert Häring, Frankfurt

Summary Minutes of the Meeting of the ECB Shadow Council on February 1, 2007

The ECB Shadow Council recommended, with a majority of ten votes in favour, that the ECB Governing Council raise its key interest rate by a quarter point to 3.75 percent at its forthcoming policy meeting on February 8. .Nine members favoured a recommendation of unchanged rates. One of the members voting for higher rates would have preferred a larger rate increase to 4.0 percent. The ECB last raised its key interest rate on December 7 to 3.5 percent.

Eight members of the panel regularly submit detailed economic projections. Inflation is now expected to be very slightly below the ECB’s stability threshold of two percent (1.96%) this year and to remain below two percent in 2008. Expectations for growth this year have improved further to 2.0 percent.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20062.22.7 (2.6)
20072.0 (2.1)2.0 (1.9)
20081.9 (1.9)2.0 (2.0)

Forecasters: L. Buttiglione, J. Callow, J. Escrivá, J. Fels, M. Heise, J. Llewellyn, T. Mayer, V. Riches-Flores


There was a wide consensus on the ECB Shadow Council that there was no pressing inflation danger in the next 18 to 24 months.

The majority in favour of a rate hike argued that relatively strong growth made it likely that the negative output gap in the euro area had closed or would soon be closing, leading to more inflation pressure through higher wages. The majority deems it important for the central bank to tighten monetary policy already in anticipation of this expected development.

Most members of the minority did agree with the judgement that the key rate would eventually need to be raised from the current 3.5 percent. However, this group argued that the benign short to medium term inflation outlook allowed the ECB to wait and see if potential risks to the growth outlook materialized. They mentioned uncertainty about the impact of the German VAT-hike and about the bottoming out of the US housing market.

A few members argued that there was no clear need to raise rates further at all. They cited signs of a slowdown in the European economy and in lending. They also argued that very low wage growth and falling core inflation were incompatible with the majority view that the output gap was closing fast and that monetary policy was overly accommodative.

On the other hand, several members cited the rapid expansion of M3 and credit aggregates as a clear sign of an overly accommodative monetary policy. One member argued that a lot of this was driven by large capital inflows into the euro area, which were induced by low interest rates elsewhere. Others agreed that this might indeed be a factor, but argued that there was still a case for the ECB to offset this influence in order to avoid financial distortions.

Changes in Membership

The Shadow Council welcomed Giancarlo Corsetti, economics professor at the European University Institute in Florence, as a new member. He replaces outgoing member John Llewellyn.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

hike 0.25

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.25
Joachim FelsMorgan Stanley, Londonno change
Thomas MayerDeutsche Bank, Londonhike 0.25
Daniel GrosCenter of European Policy Studies (CEPS), Brusselsno change
Willem BuiterLondon School of Economics and Goldman Sachshike 0.5
André SapirUniversité Libre de Bruxelles and Bruegelhike 0.25
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
Luigi ButtiglioneRubicon, Londonhike 0.25
Stephen KingHSBC, Londonhike 0.25
Giancarlo CorsettiEuropean University Institute, Florencehike 0.25
Marie DironBrevan Howard, Londonno change
Véronique Riches-FloresSociété Générale, Parishike 0.25
Gernot NerbIfo-Institute, Munichno change
José Luis EscriváBBVA, Madridhike 0.25
Julian CallowBarclays Capital, Londonno change
Philip LaneTrinity College Dublinno change
Agnès Bénassy-QuéréCEPII, Parisno change
Charles WyploszGraduate Institute of International Studies, Genevahike 0.25
Angel UbideTudor Investment Corporation, Washington D.C.no change

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates.


Thursday, February 1, 2007
Marie Diron, London   Norbert Häring, Frankfurt

Summary of the January-07-discussion on rates

In late December 06 and early January 07 the ECB Shadow Council did an opinion update by e-mail in lieu of the usual conference call. The Shadow Council recommended with 16 votes that the ECB should leave interest rates unchanged at its next policy meeting on January 11. Three members recommended a hike in interest rates, instead, two by 25 basis points and one by 50 basis points. The number of members was increased to 19 in order to continue to mimic the size of the ECB Governing Council.

The written opinions of the members of the Shadow Council show that the gradual tightening course of the ECB Governing Council commands increasing support. Most members are confident that the European economy is robust enough to weather further tightening of monetary policy, which the majority deems necessary to prevent inflationary pressure from materializing. Only three members considered the need for higher rates urgent enough to justify another rate increase right after the ECB hiked the key rate to 3.5 percent on December 7. Two thirds of members expressed the judgement that policy will need to be tightened further in the near future. A minority is rather concerned that a slowdown in world growth, the effect of the increased VAT rate in Germany and the lagged effect of past rate increases might lead to a marked slowdown in the economic activity of the euro area.

Eight members of the panel regularly submit detailed economic projections. All forecasters expect average inflation next year to be at or slightly above two percent and most foresee a decline below two percent in 2008 with the average forecast standing at 1.9 percent. All inflation forecasts were unchanged from a month ago. Growth is on average expected to come down significantly from the strong 2.7 percent expected this year to 1.9 percent next year and to recover slightly in 2008 to 2.0 percent. The average forecast for growth was revised up slightly again for 2006 and 2007.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20062,2 (2,2)2,7 (2,6)
20072,1 (2,1)1,9 (1,8)
20081.9 (1.9)2.0 (2.0)

Forecasters: L. Buttiglione, J. Callow, J. Escrivá, J. Fels, M. Heise, J. Llewellyn, T. Mayer, V. Riches-Flores


Changes in Membership

Francesco Giavazzi left the ECB Shadow Council to go to the MIT in Cambridge, Mass. for six months. Stephen King, Chief Economist of HSBC in London, and Marie Diron, Euopean Economist of Brevan Howard in London, joined the Shadow Council and voted for the first time.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

no change

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.25
Joachim FelsMorgan Stanley, Londonno change
Thomas MayerDeutsche Bank, Londonno change
Daniel GrosCenter of European Policy Studies (CEPS), Brusselsno change
Willem BuiterLondon School of Economics and Goldman Sachshike 0.5
André SapirUniversité Libre de Bruxelles and Bruegelhike 0.25
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
Luigi ButtiglioneKatholieke Universiteit Leuvenno change
Marie DironBrevan Howard, Londonno change
Stephen KingHSBC, Londonno change
Véronique Riches-FloresSociété Générale, Parisno change
Gernot NerbIfo-Institute, Munichno change
Julian CallowBarclays Capital, Londonno change
José Luis EscriváBBVA, Madridno change
Philip LaneTrinity College Dublinno change
Agnès Bénassy-QuéréCEPII, Parisno change
Charles WyploszGraduate Institute of International Studies, Genevano change
Angel UbideTudor Investment Corporation, Washington D.C.no change
John LlewellynLehman Brothers, Londonno change

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates.


Monday, January 8, 2006
Norbert Häring, Frankfurt

Summary Minutes of the Meeting on November 30, 2006

At its fourth annual physical meeting in Frankfurt the ECB Shadow Council recommended, with a majority of 13 votes, that the ECB Governing Council raise its key interest rate by a quarter point to 3.5 percent at its forthcoming policy meeting on December 7. Five members favoured a pause in the rate hiking cycle. Two of those voting for higher rates would have preferred a larger rate increase to 3.75 percent. The ECB last raised its key interest rate on October 5 to 3.25 percent.

Eight members of the panel regularly submit detailed economic projections. All forecasters expect average inflation next year to be at or slightly above two percent and most foresee a decline below two percent in 2008 with the average forecast standing at 1.9 percent. Growth is on average expected to come down significantly from the strong 2.6 percent expected this year to 1.8 percent next year and to recover slightly in 2008 to 2.0 percent. The range of growth forecasts for 2008 goes from 1.5 to 2.3 percent.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20062,2 (2,2)2,6 (2,6)
20072,1 (2,1)1,8 (1,8)
20081.9 (1.9)2.0 (2.0)

Forecasters: L. Buttiglione, J. Callow, J. Escrivá, J. Fels, M. Heise, J. Llewellyn, T. Mayer, V. Riches-Flores


For those members advocating unchanged rates, signs of a housing-market driven slowdown in the US, uncertain repercussions of the large VAT increase in Germany and the recent appreciation of the Euro to 1.32 dollars were the main concerns.

The majority shared these concerns (to varying degrees). However, among these members the view dominated that developments observed so far had not been adverse enough to give reason for a longer pause in what is generally perceived as a process of interest rate normalization. Several members expressed the view that only if the world economy were to slow down more than expected or the Euro were to further appreciate, were would be a reason for the ECB to stop hiking or even cutting rates.

Only a few members perceived the relatively rapid expansion of M3 as an argument to raise rates. However, the even more dynamic expansion of credit aggregates was seen by many members as a clear sign, that monetary policy was too easy. Members also cited speculative excesses in the private equity market as evidence of this.

While the majority advocating a rate hike expects wage pressures to pick up in line with the improving economy, the minority put emphasis on subdued wage developments so far and on declining unit labor costs. The minority argued that this allowed the ECB enough leeway to wait with the next rate hike, until the outlook for the economy became a little less uncertain.

Looking into the time after a widely expected ECB rate hike in December it looks as if support for further rate increases will not be very strong from the Shadow Council, at least initially. Four of the 13 members advocating higher rates now said explicitly that the December hike would probably be the last one, which they would support. Only three expressed a strong inclination to vote for more rate increases, the others stressed the uncertainty of further developments of the economy and the exchange rates.

The Shadow Council welcomed Luigi Buttiglione, chief economist of Rubicon Investment Fund Management LLP in London. Mr. Buttiglione replaced founding member Paul De Grauwe who left the Shadow Council to accept the Duisenberg research fellowship sponsored by the ECB.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

hike 0.25

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.5
Joachim FelsMorgan Stanley, Londonhike 0.25
Thomas MayerDeutsche Bank, Londonhike 0.25
Daniel GrosCenter of European Policy Studies (CEPS), Brusselshike 0.25
André SapirUniversité Libre de Bruxelles and Bruegelno change
Michael HeiseDresdner Bank / Allianz, Frankfurthike 0,25
Willem BuiterLondon School of Economicshike 0.5
Luigi ButtiglioneKatholieke Universiteit Leuvenhike 0.25
Véronique Riches-FloresSociété Générale, Parishike 0,25
Gernot NerbIfo-Institute, Munichhike 0,25
Julian CallowBarclays Capital, Londonno change
José Luis EscriváBBVA, Madridhike 0,25
Philip LaneTrinity College Dublinhike 0,25
Agnès Bénassy-QuéréCEPII, Parisno change
Angel UbideTudor Investment Corporation, Washington D.C.no change
Charles WyploszGraduate Institute of International Studies, Genevano change
John LlewellynLehman Brothers, Londonhike 0,25
Francesco GiavazziUniversità Bocconi, Milanhike 0.25

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates.


Thursday, November 30, 2006
Norbert Häring, Frankfurt

Summary Minutes of the Meeting on October 26, 2006

The Shadow Council recommended, by twelve votes to six, that the ECB Governing Council keep its key interest rate unchanged at its forthcoming policy meeting on November 2. Six members favoured a rate hike, instead. Of these, four preferred a hike of 25 basis points, two a hike of 50 basis points. The ECB last raised its key interest rate on October 5 to 3.25 percent.

A large majority of members was of the opinion that a further increase in the key rate to at least 3.5 percent was warranted. However, most preferred to proceed in a gradual fashion rather than hiking the interest rate in two consecutive months.

Seven members of the panel regularly submit detailed economic projections. The most marked change over a month ago was a downward adjustment of the average inflation expectation for 2007 from 2.3 to 2.1 percent in reaction to the recent decline in oil prices. The inflation forecast for 2008 increased slightly to 1.9 percent. Growth is expected to slow from an upwardly revised 2.6 percent this year to 1.8 percent next year (unchanged) and pick up again to 2.0 percent.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20052,21,4
20062,2 (2,2)2,6 (2,5)
20072,1 (2,3)1,8 (1,8)
20081.9 (1.8)2.0 (2.1)

Forecasters: J. Callow, J. Escrivá, J. Fels, M. Heise, J. Llewellyn, T. Mayer, V. Riches-Flores


As in past meetings a majority of members favoured a gradual tightening course, which would allow the ECB to monitor the reaction of the economy to past rate hikes. Many members expressed the opinion that a likely slowdown of growth in 2007, brought about by the VAT hike in Germany and an expected slowdown in global growth, would make it appropriate to proceed very carefully with further rate hikes. In particular, the potential of a housing-market driven sharp slowdown in the US remained a key concern of Shadow Council members in terms of risks to growth.

While a large majority thinks that upon current information a rate hike to 3.5 percent in December will be warranted, there is no consensus on the Shadow Council about the appropriate course of action further in the future. Roughly half of the members foresee no need for the key rate to go higher than that, the other half sees a need for further rate hikes beyond 3.5 percent.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

no change

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.5
Joachim FelsMorgan Stanley, Londonhike 0.25
Thomas MayerDeutsche Bank, Londonhike 0.25
Daniel GrosCenter of European Policy Studies (CEPS), Brusselshike 0.25
André SapirUniversité Libre de Bruxelles and Bruegelno change
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
Willem BuiterLondon School of Economicshike 0.5
Véronique Riches-FloresSociété Générale, Parisno change
Gernot NerbIfo-Institute, Munichno change
Julian CallowBarclays Capital, Londonno change
José Luis EscriváBBVA, Madridno change
Philip LaneTrinity College Dublinno change
Agnès Bénassy-QuéréCEPII, Parisno change
Angel UbideTudor Investment Corporation, Washington D.C.no change
Charles WyploszGraduate Institute of International Studies, Genevano change
Paul De GrauweKatholieke Universiteit Leuvenno change
John LlewellynLehman Brothers, Londonno change
Francesco GiavazziUniversità Bocconi, Milanhike 0.25

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates.


Sunday, October 29, 2006
Olaf Storbeck, Düsseldorf    Norbert Häring, Frankfurt

Summary Minutes of the Meeting on September 28, 2006

The Shadow Council recommended, by 15 votes to 3, that the ECB Governing Council raise its key interest rate at its forthcoming policy meeting on October 5. A majority of 11 members favoured a rate hike of 25 basis points, four more argued in favour of a rate increase of 50 basis points. This is the largest majority in favour of a rate hike and the largest number of proponents of a 50 bp rate hike in the four-year-history of the ECB Shadow Council.

The main factors contributing to the broadening of the consensus for a further removal of monetary stimulus were (i) a widespread perception that pipeline inflation pressure had increased globally and within the Eurozone, (ii) that wages would probably rise a little faster, due to a tightening labour market and (iii) stronger than expected growth in the first three quarters of this year. Some members also argued that the recent fall in oil prices had removed an important downside risk to growth. The likely fall in HICP-inflation below two percent in September was generally regarded as a temporary phenomenon, which should not have much impact on monetary policy.

Seven members of the panel regularly submit detailed economic projections. Overall these forecasts show a further increase in optimism regarding future growth and a slightly better inflation outlook, compared to last month. The average growth forecast for this year rose again to 2.5 percent. For 2007 it went up a little to 1.8 percent. The average inflation forecasts for this year fell to 2.2 percent, for next year it remained unchanged at 2.3 percent. For 2008, the panel is forecasting GDP growth of 2.1 percent and a decline of inflation to 1.8 percent.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20052,21,4
20062,2 (2,3)2,5 (2,4)
20072,3 (2,3)1,8 (1,7)
20081.8 (1.9)2.1 (2.2)

Forecasters: J. Callow, J. Escrivá, J. Fels, M. Heise, J. Llewellyn, T. Mayer, V. Riches-Flores


While there was very widespread ex-post support on the Shadow Council for the monetary policy conducted by the ECB in the recent past and also very widespread support for a moderate rate hike on October 5, just a few members would support – upon current information – an extended period of further rate hikes. Only two or three members, most notably Willem Buiter and Thorsten Polleit, think that in their central scenario rates will have to go significantly above four percent during this cycle. Almost all the other members argued that letting the key rate peak at 3.5 or 3.75 percent at the most will likely be the appropriate policy. Behind the disagreement are different estimates of the level of the neutral or natural interest rate in the Eurozone. Paul De Grauwe drew attention to the fact that the neutral-rate-framework of discussing monetary policy had gained a lot of prominence in recent months within the Shadow Council.

While only three members considered risks to growth important enough to not support a rate hike, several more members expressed the opinion that a likely slowdown of growth in 2007 would make it appropriate to proceed very carefully with further rate hikes. The risks cited most often were a slowdown in global growth, in particular a housing-market driven slowdown in the US, and the effects of the planed tightening of fiscal policy in several Eurozone countries and the VAT increase in Germany in particular. Also mentioned were the lagged effects of past interest rate increases and of the stronger Euro.

There was no consensus about the significance of the recent fall of ten-year-bond-yields to only slightly above 3.6 percent. One view was that this is a bond bubble, to be seen in the context of a general mis-pricing of financial assets. The other view regards it as a reasonable reflection of downside growth risks by bond market participants.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

hike 0.25

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.5
Joachim FelsMorgan Stanley, Londonhike 0.5
Thomas MayerDeutsche Bank, Londonhike 0.5
Daniel GrosCenter of European Policy Studies (CEPS), Brusselshike 0.25
André SapirUniversité Libre de Bruxelles and Bruegelhike 0.25
Michael HeiseDresdner Bank / Allianz, Frankfurthike 0.25
Willem BuiterLondon School of Economicshike 0.5
Véronique Riches-FloresSociété Générale, Parishike 0.25
Gernot NerbIfo-Institute, Munichhike 0.25
Julian CallowBarclays Capital, Londonhike 0.25
José Luis EscriváBBVA, Madridhike 0.25
Philip LaneTrinity College Dublinhike 0.25
Agnès Bénassy-QuéréCEPII, Parisno change
Angel UbideTudor Investment Corporation, Washington D.C.no change
Charles WyploszGraduate Institute of International Studies, Genevahike 0.25
Paul De GrauweKatholieke Universiteit Leuvenhike 0.25
John LlewellynLehman Brothers, Londonno change
Francesco GiavazziUniversità Bocconi, Milanhike 0.25

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates.


Thursday, September 28, 2006
Norbert Häring, Frankfurt    Joachim Fels, London

Summary Minutes of the Meeting on August 24, 2006

The Shadow Council recommended, by 14 votes to 3, that the ECB Governing Council keep its key interest rate unchanged at 3.0 percent at its forthcoming policy meeting on August 31. Three members were in favour of again raising the interest rate, which was last raised on August 3. Of these members, one favoured a hike of 50 basis points, the other two a 25 basis point increase.

The Shadow Council welcomed Véronique Riches-Flores, European Chief Economist of Société Générale, who replaces outgoing member Patrick Mange.

Seven members of the panel regularly submit detailed economic projections. The average growth forecast for this year rose by 0.2 percentage points, to 2.4 percent, but for 2007was unchanged, at 1.7 percent. For 2008, the Shadow Council forecasters on average expect growth of 2.2 percent. The average inflation forecasts rose to 2.3 percent for this year and next. For 2008 Shadow Council forecasters now expect an inflation rate of 1.9 percent, which is in line with the ECB definition of price stability, but slightly higher than last month.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20052,21,4
20062,3 (2,2)2,4 (2,2)
20072,3 (2,1)1,7 (1,7)
20081.9 (1.8)2.2 (1.9)

Forecasters: J. Callow, J. Escrivá, J. Fels, M. Heise, J. Llewellyn, T. Mayer, V. Riches-Flores


There was a broad consensus in the committee that the ECB’s key interest rate, at 3.0 percent, is still expansionary, and will likely have to be increased further. However, a large majority of members argued against speeding up the pace of tightening, and supported the ECB’s recent practice of raising rates by a quarter point every two or three months. They argued that inflation and inflation expectations were stable – albeit somewhat too high –and that this allowed the central bank to proceed slowly, and watch the cumulative effect of past increases working though the economy before raising rates all the way to a neutral or even restrictive level. In their view, this would enable policy makers to delay or even cancel further moves, were signs of economic stress to emerge.

As regards the main risks to economic growth, many members identified: a slowdown of the US and the world economy; delayed effects of higher oil prices and past tightening moves; tighter fiscal policy in 2007; and a stronger Euro.

Expressing a non-consensus view, Thorsten Polleit, Jaochim Fels, and Francesco Giavazzi pressed for another rate hike already on August 31. They argued against a strong focus on growth expectations, preferring that the ECB focus on inflation and inflation expectations, which they regard as too elevated to permit an expansionary monetary stance to be maintained. Willem Buiter, who in past months has consistently expressed a strong preference for an early removal of monetary stimulus, was not present at the meeting.

Away from the consensus on the other side, Véronique Riches-Flores, Angel Ubide, and Julian Callow warned the ECB strongly against pre-committing to further hike rates. They expressed particular concern about the potential consequences of any abrupt slowdown of the US housing market, as well as of the US economy in general.

Members` individual rate recommendations were as follows:

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

no change

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.5
Joachim FelsMorgan Stanley, Londonhike 0.25
Thomas MayerDeutsche Bank, Londonno change
Daniel GrosCenter of European Policy Studies (CEPS), Brusselsno change
André SapirUniversité Libre de Bruxelles and Bruegelno change
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
Willem BuiterLondon School of Economicsn/a
Véronique Riches-FloresSociété Générale, Parisno change
Gernot NerbIfo-Institute, Munichno change
Julian CallowBarclays Capital, Londonno change
José Luis EscriváBBVA, Madridno change
Philip LaneTrinity College Dublinno change
Agnès Bénassy-QuéréCEPII, Parisno change
Angel UbideTudor Investment Corporation, Washington D.C.no change
Charles WyploszGraduate Institute of International Studies, Genevano change
Paul De GrauweKatholieke Universiteit Leuvenno change
John LlewellynLehman Brothers, Londonno change
Francesco GiavazziUniversità Bocconi, Milanhike 0.25

* Members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates.


Friday, August 25, 2006
Norbert Häring, Frankfurt    John Llewellyn, London



Summary Minutes of the Meeting on June 29, 2006

The Shadow Council recommended with twelve of 18 votes that the ECB Governing Council keep its key interest rate unchanged at 2.75 percent at its next policy meeting on July 6. Six members were in favour of raising the interest rate again, which was last raised on June 8. Of these, three favoured a larger rate hike of 50 basis points.

Seven members of the panel regularly submit detailed economic projections. The average growth forecasts were unchanged from last month at 2.1 percent in 2006 and 1.7 percent in 2007. Both are a notch below the midpoint of the ECB staff forecast from June. For 2008 Shadow Council forecasters on average expect a growth rate of 1.9 percent. The average inflation forecasts of the Shadow council remained unchanged at 2.2 percent for this year and 2.1 percent for 2007. This is also a notch below ECB staff estimates. For 2008 Shadow Council forecasters expect an inflation rate of 1.8 percent.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20052,21,4
20062,2 (2,2)2,1 (2,1)
20072,1 (2,1)1,7 (1,7)
20081,9 (-)1,7 (-)

Forecasters: J. Callow, J. Escrivá, J. Fels, M. Heise, J. Llewellyn, P. Mange, T. Mayer


Even after the last rate hike, there was a broad consensus in the committee that the ECB’s key interest rate at 2.75 percent was still expansionary and should be increased as economic conditions in the euro area continued to improve. Recent economic indicators were generally regarded as positive to very positive.

Positive economic indicators induced Francesco Giavazzi, who had consistently advocated no change in rates for many months and Willem Buiter, who had favoured small rate hikes in the past months, to recommend a larger rate increase by 50 basis points to 3.25 percent. Both argued that there was no merit in delaying a rate move if there was a wide consensus that it was needed and this need was already well communicated. Together with other proponents of a rate hike they argued that the ECB risks falling behind the curve or has already fallen behind the curve

The main arguments of the majority, opposing an acceleration of rate increases were risks stemming from volatile financial markets and from an expected slowdown in the US economy. Thomas Mayer, who had consistently advocated rate increases for the last year cited fragile conditions in financial markets and imminent moves by the US Federal Reserve and the Bank of Japan as his main reasons for now advocating a short pause in the rate hike cycle. Several members warned that a slowdown of the US economy was likely. In their view this argued for a moderate pace of tightening, which would enable policy makers to pause or abort further moves if signs of economic stress would emerge.

Regarding inflationary pressures a majority of members still qualified these as rather muted. However, a growing minority expressed concern about rising inflation expectations and strengthening demand in the context of an inflation rate, which is already above target.

In the ongoing discussion in the committee of the peak of the interest rate which the ECB should aim for, Willem Buiter weighed in to side with Charles Wyplosz and Philip Lane who had argued before that the majority estimate of about 3.25 to 3.5 percent was too low. Buiter put his own estimate of the neutral rate at above 4 percent.

There was a discussion on interest rate smoothing. Willem Buiter and Francesco Giavazzi argued that there was no legitimate basis for it, if it was clear rates had to go higher. They would only admit uncertainty about the appropriateness of a rate hike as a reason to go slowly. Several other members, however, argued that it was better to go slowly in order not to unsettle nervous markets and to see how past rate hikes are being digested, before moving further.

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

no change

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.5
Joachim FelsMorgan Stanley, Londonhike 0.25
Thomas MayerDeutsche Bank, Londonno change
Daniel GrosCenter of European Policy Studies (CEPS), Brusselshike 0.25
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
André SapirUniversité Libre de Bruxelles and Bruegelhike 0.25
Willem BuiterLondon School of Economicshike 0.5
Patrick MangeBNP Paribas Asset Management, Parisno change
José Luis EscriváBBVA, Madridno change
Gernot NerbIfo-Institute, Munichno change
Julian CallowBarclays Capital, Londonno change
Philip LaneTrinity College Dublinno change
Agnès Bénassy-QuéréCEPII, Parisno change
Angel UbideTudor Investment Corporation, Washington D.C.no change
Charles WyploszGraduate Institute of International Studies, Genevano change
Paul De GrauweKatholieke Universiteit Leuvenno change
John LlewellynLehman Brothers, Londonno change
Francesco GiavazziUniversità Bocconi, Milanhike 0.5

* members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates.


Thursday, June 29, 2006
Norbert Häring, Frankfurt    Thomas Mayer, London

Summary Minutes of the Meeting on June 1, 2006

The Shadow Council recommended with 14 votes in favour that the ECB Governing Council raise its key interest rate at its next policy meeting on June 8. Four members were in favour of leaving interest rates unchanged. As regards the size of the recommended rate hike, 13 members recommended an increase of 25 basis points, which would take the minimum bid rate to 2.75 percent, one voted for a larger rate increase of 50 basis points. A month ago a narrow majority of ten members had recommended no change in rates and two members had voted for a hike of 50 basis points.

Seven members of the panel regularly submit detailed economic projections. The average growth forecasts were unchanged from last month at 2.1 percent in 2006 and 1.7 percent in 2007. The forecast for 2007 is 0.3 percentage points below the ECB staff’s expectation. The average inflation forecasts of the Shadow council rose slightly further to 2.2 percent for this year and to 2.1 percent for 2007. This is roughly in line with ECB staff estimates from March. The Shadow Council forecasts differ from ECB Staff forecasts in the fact that ECB forecasts so far have been produced under the assumption of unchanged ECB interest rates. Shadow Council forecasters use their own forecasts for ECB interest rates instead. The difference will become less significant soon, since the ECB has announced that they will forecast on the basis of an interest rate profile as implied by market rates from June onwards.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20052,21,4
20062,2 (2,1)2,1 (2,1)
20072,1 (2,0)1,7 (1,7)

Forecasters: J. Callow, J. Escrivá, J. Fels, M. Heise, J. Llewellyn, P. Mange, T. Mayer


As before there was a broad consensus in the committee that the ECB’s key interest rate at 2.5 percent was still expansionary and should be increased as economic conditions in the euro area continued to improve. With recent economic indicators regarded as generally positive, most members felt that the economic outlook for the euro area had not changed much since last month. Thus, the main reason leading to the formation of a majority in favour of a rate increase was passage of time since the last increase. Many members emphasized the need to proceed slowly and carefully in the process of “normalizing” rates. Some of these members felt that a pace of one increase per quarter was an appropriate pace, while another increase only one or two months after the last would have been too fast.

Many members warned that a larger rate increase next week than the market anticipated would be dangerous. They argued that stock and bond markets had become quite nervous recently and therefore susceptible to large moves in case of unpleasant rate surprises. There was also a wide consensus that the recent appreciation of the Euro had already produced some of the necessary tightening of monetary conditions and that a large rate increase could lead to excessive upward momentum for the Euro exchange rate. Members expressed concern that falling stock and bond markets and a rising Euro might hurt confidence and derail the economic upswing. One member argued that this risk was not worth taking since another rate increase could be administered a month later if needed, in case markets proved resilient. Thorsten Polleit disagreed with the majority, arguing that a rate increase to 3 percent and beyond was already priced in on the market and that speeding up the process of getting there would not likely unsettle markets.

Members who argued against a rate hike cited expectations of a likely slowdown in the world economy, muted inflation pressure and recent market turbulence and the appreciation of the Euro as their main arguments.

There was a discussion on the committee about the peak of the interest rate at which the ECB should aim, based on current information and expectations. Charles Wyplosz argued that getting to five percent within six quarters would seem appropriate. Most members thought this target was much too high. The majority thought that 3.25 to 3.5 percent was an appropriate peak to aim at for the current cycle. Charles Wyplosz argued that it was normal to expect that the policy stance would have to move from expansionary to restrictive at some point rather than just going to neutral and staying there. Philip Lane provided some support by arguing that economic developments in Asia made it likely that this region would not keep global price pressures down as much in the future as in the past. Most members however felt that going to neutral would be enough, given that wage pressures were regarded as very muted and only a moderate economic upswing was expected.

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

hike 0.25

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.5
Joachim FelsMorgan Stanley, Londonhike 0.25
Thomas MayerDeutsche Bank, Londonhike 0.25
Daniel GrosCenter of European Policy Studies (CEPS), Brusselshike 0.25
Michael HeiseDresdner Bank / Allianz, Frankfurthike 0.25
André SapirUniversité Libre de Bruxelles and Bruegelhike 0.25
Willem BuiterLondon School of Economicshike 0.25
Patrick MangeBNP Paribas Asset Management, Parishike 0.25
José Luis EscriváBBVA, Madridno change
Gernot NerbIfo-Institute, Munichhike 0.25
Julian CallowBarclays Capital, Londonhike 0.25
Philip LaneTrinity College Dublinhike 0.25
Agnès Bénassy-QuéréCEPII, Parisno change
Angel UbideTudor Investment Corporation, Washington D.C.hike 0.25
Charles WyploszGraduate Institute of International Studies, Genevahike 0.25
Paul De GrauweKatholieke Universiteit Leuvenno change
John LlewellynLehman Brothers, Londonhike 0.25
Francesco GiavazziUniversità Bocconi, Milanno change

* members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates.


Friday, June 2, 2006
Norbert Häring, Frankfurt    Angel Ubide, Washington DC

Summary Minutes of the Meeting on April 27, 2006

The Shadow Council recommended that the ECB Governing Council leave its key interest rate unchanged at 2.5 percent at its policy meeting next Thursday. Ten members were in favor of this recommendation, while eight were in favor of a rate hike. Furthermore Shadow Council members urged the ECB General Council to consider publishing minutes to improve the public's understanding of the ECB's reaction function.

Seven members of the panel regularly submit detailed economic projections. These projections show an increasing optimism regarding growth prospects in the Euro Area and slightly higher inflation expectations in the short term. The average growth forecasts went up a notch to 2.1 percent in 2006 and 1.7 percent in 2007. As regards 2006, this forecast is in line with the ECB staff forecast from March, while the forecast for 2007 still 0.3 percentage points below the ECB staff’s expectation. The average inflation forecast of the Shadow council for this year increased slightly to 2.1 percent and remained unchanged at 2.0 percent for 2007. This is a little lower than the ECB staff estimate of 2.2 percent in both years.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20052,21,4
20062,1 (2,0)2,1 (2,0)
20072,0 (2,0)1,7 (1,6)

Forecasters: J. Callow, J. Escrivá, J. Fels, M. Heise, J. Llewellyn, P. Mange, T. Mayer


There was a broad consensus in the committee that the ECB’s key interest rate at 2.5 percent was still expansionary and should be increased as economic conditions in the Euro Area continued to improve. The main issue of contention was the appropriate pace of withdrawal of monetary stimulus. A narrow majority argued against increasing the speed of tightening moves from the 25 basis points per quarter, which the ECB has chosen in the last two quarters. Several members argued the ECB might fuel an inappropriately steep rise in the Euro if it were to increase the pace of monetary tightening. Also in favour of patience members in this camp argued that it would be wise for the ECB to await GDP data on the first quarter before moving again. Members in this camp argued that low core inflation indicated the absence of an imminent inflation threat, allowing the ECB to proceed with tightening at a very moderate pace. In spite of what was generally perceived as favourable business cycle data there was some lingering concern about the strength and sustainability of the current upswing. This was related to the strength of the Euro, the surge in oil prices, dampening effects of the large German VAT-rise planned for January 2007 and an expected slowdown in the US in the second half of this year. Patrick Mange, who had voted for a rate hike a month ago changed his vote in favour of unchanged rates, arguing that this would give more time to analyze the effects of the recent surge of oil prices.

On the other side Julian Callow and Charles Wyplosz joined the camp of those arguing for a rate hike. Charles Wyplosz argued that a pace of a hike by 25 basis points every other month was appropriate, in light of a continued stream of favourable economic data and strong credit growth. He regarded a stronger Euro as a convenient antidote to higher oil prices, In contrast Julian Callow conceded that concern about pushing the Euro up too much was a valid argument against speeding up rate hikes. He judged, however, that the accumulation of evidence of strong economic and credit growth outweighed this concern.

Joachim Fels joined Thorsten Polleit in arguing for a larger rate increase of 50 basis points. He cited recently higher wage settlements as an indication of increasing inflation pressure. Furthermore he argued that a larger rate hake could calm financial markets by dampening the expectation of further rate hikes in the immediate future. This would likely help prevent rather than fuel an overshoot of the Euro exchange rate, he argued. The concern about inflation pressure from higher wage settlements and higher oil prices was shared by the other members arguing for higher rates. However, in the short to medium term inflation was not a salient concern even among the proponents of a rate hike.

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

no change

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0.5
Joachim FelsMorgan Stanley, Londonhike 0.5
Thomas MayerDeutsche Bank, Londonhike 0.25
Daniel GrosCenter of European Policy Studies (CEPS), Brusselshike 0.25
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
André SapirUniversité Libre de Bruxelles and Bruegelhike 0.25
Willem BuiterLondon School of Economicshike 0.25
Patrick MangeBNP Paribas Asset Management, Parisno change
José Luis EscriváBBVA, Madridno change
Gernot NerbIfo-Institute, Munichno change
Julian CallowBarclays Capital, Londonhike 0.25
Philip LaneTrinity College Dublinno change
Agnès Bénassy-QuéréCEPII, Parisno change
Angel UbideTudor Investment Corporation, Washington D.C.no change
Charles WyploszGraduate Institute of International Studies, Genevahike 0.25
Paul De GrauweKatholieke Universiteit Leuvenno change
John LlewellynLehman Brothers, Londonno change
Francesco GiavazziUniversità Bocconi, Milanno change

* members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates.


Communication Issues

In light of the widespread perception that ECB president Jean-Claude Trichet had almost ruled out a rate increase before June in the question and answer session of his press conference on April 6, the Shadow Council discussed the appropriateness of such a pre-commitment. There was a consensus that it is a prerequisite for successful central banking that markets and the public can form reasonable expectations of how the central bank would react to alternative future developments. There was also a consensus that a marked and lasting divergence of market expectations of the interest rate path from the conditional plans of the central bank was to be avoided. None of the members participating in the discussion disagreed with the proposition that the ECB's communication would be significantly enhanced by the timely publication of minutes.

Some members argued that absent this preferable solution the practice of giving some indication of the ECB’s conditional plans for the future in the press conferences was a necessary second best solution. Some members also failed to see a pre-commitment in Mr. Trichets remarks which would effectively prevent the ECB from hiking rates at its next meeting already.

A number of other members, however, expressed the feeling that Mr. Trichet had failed to stress the conditionality of his remarks and that a rate hike already on May 4 would entail some or even serous credibility issues for the ECB. Willem Buiter and Joachim Fels argued that the task of guiding market expectations was too difficult and tricky to be done in press conferences. They suggested that the monthly press conferences should be scrapped entirely. Willem Buiter argued further that guidance of expectations as attempted by Mr. Trichet required a dominant position of the president. This was not to be desired due to the superiority of collective decision making.

Thursday, April 27, 2006
Norbert Häring, Frankfurt    Julian Callow, London

Summary Minutes of the Meeting on March 30, 2006

The Shadow Council recommended that the ECB Governing Council leave its key interest rate unchanged at 2.5 percent at its policy meeting next Thursday. Eleven members were in favor of this recommendation, while seven were in favor of a rate hike.

Seven members of the panel regularly submit detailed economic projections. These were little changed from last month. The average growth forecast for 2007 went up a notch to 1.6 percent. This is significantly lower than the March ECB staff forecast of 2.0 percent. The average inflation forecast is unchanged at 2.0 percent for this year and next. This is lower than the ECB staff estimate of 2.2 percent in both years.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)



YearHICP-Inflation in %GDP-Growth in %
20052,21,4
20062,0 (2,0)2,0 (2,0)
20072,0 (2,0)1,6 (1,5)

Forecasters: J. Callow, J. Escrivá, J. Fels, M. Heise, J. Llewellyn, P. Mange, T. Mayer


There was general agreement among members that the current stance of monetary policy is still quite expansionary. There was also a consensus that business cycle, inflation and wage indicators do not point to an imminent inflation threat.

Those members who spoke in favour of following up last months rate hike with another one regard a real interest rate of only slightly above zero as suitable only for a crisis period and advocate raising it toward the so-called neutral level rather fast, even if there is no visible inflation threat in the economic data. The neutral level of nominal interest rates is generally perceived to be in the order of 3 to 3.5 %, though some members have higher estimates. Members of this camp fear that leaving monetary policy too accommodative for too long risks creating distortions in the economy. Most of them view excess money and credit growth in conjunction with sings of asset price bubbles and depressed yield spreads of risky assets as evidence of such distortions. These members are confident that the recovery is firm enough to allow the withdrawal of stimulus.

Since at least three more members generally agree with the arguments in favour of higher rates but advocate a more gradual pace of tightening, it can be expected that a majority for a rate hike-recommendation will develop in the near future.

The main argument put forward against hiking rates further was the perceived absence of an inflation risk in the Eurozone. Low wage growth, well anchored inflation expectations and low core inflation were cited by many in support of this view. Members in favour of keeping monetary policy expansionary either proposed to use the leeway given by the absence of an imminent inflation threat to test the limits of inflation-free growth, or they were concerned that the recovery was not yet robust enough to reliably withstand an aggressive monetary tightening.

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

no change

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0,5
Joachim FelsMorgan Stanley, Londonhike 0,25
Thomas MayerDeutsche Bank, Londonhike 0,25
Daniel GrosCenter of European Policy Studies (CEPS), Brusselshike 0,25
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
André SapirUniversité Libre de Bruxelles and Bruegelhike 0,25
Willem BuiterLondon School of Economicshike 0,25
Patrick MangeBNP Paribas Asset Management, Parishike 25
José Luis EscriváBBVA, Madridno change
Gernot NerbIfo-Institute, Munichno change
Julian CallowBarclays Capital, Londonno change
Philip LaneTrinity College Dublinno change
Agnès Bénassy-QuéréCEPII, Parisno change
Angel UbideTudor Investment Corporation, Washington D.C.no change
Charles WyploszGraduate Institute of International Studies, Genevano change
Paul De GrauweKatholieke Universiteit Leuvenno change
John LlewellynLehman Brothers, Londonno change
Francesco GiavazziUniversità Bocconi, Milanno change

* members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates.


Thursday, March 30, 2006
Norbert Häring, Frankfurt    Joachim Fels, London

Summary Minutes of the Meeting on February 23, 2006

The Shadow Council recommended that the ECB Governing Council raise its key interest rate by a quarter percentage point to 2.5 percent at its policy meeting next Thursday. Eleven members were in favor of a rate hike, up from five a month earlier, while 7 were in favor of unchanged rates. Julian Callow, Michael Heise, Philip Lane, Gernot Nerb, André Sapir and Angel Ubide changed their recommendation from unchanged to a rate hike.

Seven members of the panel regularly submit economic projections. These were little changed from last month. The average growth forecast for 2007 went down a notch to 1.5 percent. This is significantly lower than the December ECB staff forecast of 1.9 percent. The average inflation forecast, however, is almost identical to that of the ECB staff, at 2.0 percent both for this year and for next and was not changed from last month. Due to the difference in the importance that members place on monetary factors and on asset price developments there was only limited correlation between individual growth and inflation forecasts and rate recommendations.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL AND ECB PROJECTIONS FROM DECEMBER (In Parentheses) )



YearHICP-Inflation in %GDP-Growth in %
20052,2 (2,2)1,4 (1,4)
20062,0 (2,1)2,0 (1,9)
20072,0 (2,0)1,5 (1,9)

Forecasters: J. Callow, J. Escrivá, J. Fels, M. Heise, J. Llewellyn, P. Mange, T. Mayer


Those who changed their recommendation uniformly cited accumulating evidence of the economic recovery taking hold as the main reason for doing so. They argued that a real central bank interest rate around zero was not really appropriate for an economy growing at about its potential rate. These members stressed that rates should be moved up to a more normal rate at a slow pace in line with the firming of the recovery.

The five members who had already proposed higher rates before generally would like to see rates going up to more normal rates more quickly. This group shares the views on the economy expressed above. In addition they place a lot of emphasis on rapid growth of M3, lending and house prices. They argue that all these are strong indications of monetary policy being too loose for too long. They strongly advocate removing monetary stimulus in order to avoid that monetary policy contributes further to excessive asset price rises, which might lead to financial and economic instability later on.

The seven members who preferred waiting with rate hikes acknowledged that there were signs of improvement in business cycle-indicators. They did stress, however, that hard economic data – and in particular GDP-growth in the fourth quarter 2005 – has been much less positive than survey indicators. They take this gap as a warning that the recovery might not yet be very firm and sustainable. On the other hand, they do see no imminent threat of core inflation picking up significantly any time soon. They argued, therefore, that there would not be much risk in waiting for more confirmation that the recovery was sustainable, before hiking rates.

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

hike 0,25

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0,5
Joachim FelsMorgan Stanley, Londonhike 0,25
Marko SkrebCentral banking advisor, Zagrebhike 0,25
Thomas MayerDeutsche Bank, Londonhike 0,25
Daniel GrosCenter of European Policy Studies (CEPS), Brusselshike 0,25
Michael HeiseDresdner Bank / Allianz, Frankfurthike 0,25
André SapirUniversité Libre de Bruxelles and Bruegelhike 0,25
Patrick MangeBNP Paribas Asset Management, Parisno change
José Luis EscriváBBVA, Madridno change
Gernot NerbIfo-Institute, Munichhike 0,25
Julian CallowBarclays Capital, Londonhike 0,25
Philip LaneTrinity College Dublinhike 0,25
Agnès Bénassy-QuéréCEPII, Parisno change
Angel UbideTudor Investment Corporation, Washington D.C.hike 0,25
Charles WyploszGraduate Institute of International Studies, Genevano change
Paul De GrauweKatholieke Universiteit Leuvenno change
John LlewellynLehman Brothers, Londonno change
Francesco GiavazziUniversità Bocconi, Milanno change

* members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates.


Norbert Häring, Frankfurt, Angel Ubide, Washington
February 23, 2006



Summary Minutes of the Meeting on January 26, 2006

The Shadow Council recommended that the ECB Governing Council leave interest rates unchanged at its forthcoming policy meeting on Thursday. Five members were in favour of an immediate rate hike, up from three a month earlier, whereas 13 were in favour of unchanged rates. Francesco Giavazzi changed his vote from being in favour of a cut to unchanged. Thomas Mayer switched form unchanged to favouring a hike of 25 basis points.

An interest rate hike by the ECB in March, which according to opinion surveys is the expectation among market economists, might, however, find a supportive majority in the Shadow Council a month from now. Four members already indicated at today’s meeting that they will likely recommend a rate hike in March, if the data develop in line with their expectations. The most recent rate hike of the ECB, in December, had not been supported by a majority of Shadow Council members.

Seven members of the panel regularly submit economic projections. These were unchanged from last month. The average growth forecast for 2007, of 1.6 percent, is significantly lower than the December ECB staff forecast of 1.9 percent. The inflation forecast, however, is almost identical to that of the ECB staff, at 2.0 percent both for this year and for next.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL AND ECB POJECTIONS FROM DECEMBER (In Parentheses) )



YearHICP-Inflation in %GDP-Growth in %
20052,2 (2,2)1,4 (1,4)
20062,0 (2,1)2,0 (1,9)
20072,0 (2,0)1,6 (1,9)

Forecasters: J. Callow, J. Escrivá, J. Fels, M. Heise, J. Llewellyn, P. Mange, T. Mayer


There was broad consensus that price stability in a narrow sense is not in jeopardy. The five members who recommended a rate hike did so because they focus on: potential financial instabilities emanating from strong monetary and credit growth; associated asset price inflation, notably housing price inflation; and excessive risk taking in financial markets. They argued that these were all signs of an excessively loose monetary policy. They expressed the fear that perceived financial excesses could lead first to financial instability, and later to destabilization of the real economy.

This view was hotly debated. Arguments against were that small rises in interest rates would do nothing significant to halt the housing boom in some Eurozone countries, while large rate increases would be damaging to the economy. Proponents of the argument insisted that they did not favor targeting asset prices, but rather that were taking them as an indication of an unduly loose monetary policy, together with money and credit data.

José Luis Escrivá argued that money and credit were not the right items to look at in order to assess risks to financial stability. In his view, it is debt levels that matter. He claimed that measures of indebtedness were in reasonable ranges, and far below UK-levels.

Joachim Fels argued that the ECB should act quickly to raise rates, because there was a “window of opportunity” which could close soon with slower worldwide growth ahead. The argument that the ECB needed to create room for maneuver now, which it might need later in case of a slowdown, was supported by Thomas Mayer. Several other members challenged it, with Charles Wyplosz most pointedly saying it amounted to “hurting ourselves now so we have room for relief later.”

It was generally acknowledged that recent economic data had generally been positive, and that the risks to growth seemed to have receded somewhat. However several members observed that most of the good news had come from Germany, and that Germany should not be taken for the whole. Members also cited evidence of a growth slowdown in the fourth quarter, a rising Euro, and expectations of a global growth slowdown as reasons to proceed slowly and carefully with the tightening monetary policy.

INDIVIDUAL VOTES (Recommended rate change in percentage points)



Member*AffiliationVote

Majority Recommendation

no change

Thorsten PolleitECB-Observer and Barclays Capital, Frankfurthike 0,5
Joachim FelsMorgan Stanley, Londonhike 0,25
Marko SkrebCentral banking advisor, Zagrebhike 0,25
Thomas MayerDeutsche Bank, Londonhike 0,25
Daniel GrosCenter of European Policy Studies (CEPS), Brusselshike 0,25
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
André SapirUniversité Libre de Bruxelles and Bruegelno change
Patrick MangeBNP Paribas Asset Management, Parisno change
José Luis EscriváBBVA, Madridno change
Gernot NerbIfo-Institute, Munichno change
Julian CallowBarclays Capital, Londonno change
Philip LaneTrinity College Dublinno change
Agnès Bénassy-QuéréCEPII, Parisno change
Angel UbideTudor Investment Corporation, Washington D.C.no change
Charles WyploszGraduate Institute of International Studies, Genevano change
Paul De GrauweKatholieke Universiteit Leuvenno change
John LlewellynLehman Brothers, Londonno change
Francesco GiavazziUniversità Bocconi, Milanno change

* members are listed according to the average of their past rate recommendations in decreasing order of preference for higher interest rates.


Frankfurt, January 26, 2006
Norbert Häring



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