Between late June and late August the growth outlook deteriorated markedly in the view of the Shadow Council. The average forecast for 2009 was cut from 1.3 percent to 0.8 percent. On the other hand, the inflation forecast for 2009 crept up further to 2.5 percent. This indicates a need for the ECB to strongly revise downward the midpoint of their staff projections (to be released September 4), and potentially to revise upwards the inflation forecast. In June the ECB staff forecast growth of 1.5 percent and inflation of 2.4 percent in 2009
|2008||3.6 (3.6)||1.3 (1.6)|
|2009||2.5 (2.4)||0.8 (1.3)|
Contributors:. J. Cailloux; J. Callow; M. Diron; M. Hume; S. King; T. Mayer; V. Riches-Flores; J.-M. Six
Assumptions: All but one forecaster assumed an unchanged ECB rate of 4.25 percent for the next six months. One assumed that the rate would go up to 4.5 percent within six months.
Many of those who thought that the ECB made a mistake when they hiked rates in July refrained from suggesting an immediate reversal on the grounds that this would tarnish the reputation of the central bank. Several members also raised the argument that a policy move in a new direction should only be considered if it was reasonably clear that more moves in the same direction would be required.
Those who argued for an immediate cut either argued that a recession was looming and significant easing was indeed required, or they considered that the long lags in policy put a premium on timely rate adjustments.
Four members argued that inflation pressure was too strong to permit giving priority to supporting growth. With inflation rates of close to four percent (preliminary 3.8 percent in August), these members considered it a major risk to the credibility of the ECB to give such an impression. According to this group, the trade off between inflation and growth had worsened significantly, such that the central bank had less scope to support growth without endangering price stability.
While this diagnosis was supported by other committee members, most of these tended to see the worsened trade-off as an argument in favour of a less time-horizon for meeting the ambitious inflation target.
Michael Hume, European Chief Economist of Lehman Brothers joined the ECB Shadow Council to replace outgoing member Willem Buiter.
|Members' individual votes for September 4 (and bias*):|
|Jose Alzola||Consultant||no change (down)|
|Agnes Benassy-Quere||CEPII||cut 0.25 (down)|
|Jacques Cailloux||no change (down)|
|Julian Callow||Barclays Capital||no change (down)|
|Giancarlo Corsetti||Europ. Univ. Institute||no change (down)|
|Marie Diron||Oxford Economics||no change|
|Daniel Gros||CEPS||no change|
|Michael Hume||cut 0.25 (down)|
|Stephen King||no change|
|Thomas Mayer||cut 0.25 (down)|
|Gernot Nerb||Ifo-Institute||no change (down)|
|Veronique Riches-Flores||cut 0.25 (down)|
|Jean-Michel Six||Standard & Poor's||no change (down)|
|Angel Ubide||Tudor||no change|
|Charles Wyplosz||Grad. Institute. Geneva||no change|
* Lead question regarding the bias: Upon current information, should rates be lower or higher in about three months time?
Frankfurt, August 29