ECB Shadow-Council
Most members argue in favour of QE

The majority of the members of the Shadow ECB Council drew a positive conclusion of the ECB's bond purchasing programme at its meeting on 27 August 2015. But many expect an extension beyond September 2016.
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FrankfurtA majority of the members argued that the positive effects of the QE programme have outweighed  the defects so far. A minority takes the opposite position. The average forecasts for inflation were revised down slightly to 0.2 percent for 2015 and to 1.1 percent for 2016. Many members expect that the QE programme of the ECB will be extended beyond September 2016.  

Inflation forecasts still far below ECB projections

Compared to three months ago, the average forecasts for inflation this year was reduced to 0.2 percent, after it was raised in the preceding three month period to end of May. This compares to a forecast of 0.3 percent of the ECB-staff from June, which rose from 0.0 percent in March. The Shadow Council’s mean forecast for 2016 went down slightly to 1.1 percent - which is below the ECB’s June-projections of 1.5 percent.

The Shadow Council’s mean forecast for GDP-growth remained at 1.3 percent for 2015 and 1.5 percent for 2016.    

 

Shadow Council macroeconomic forecasts (ECB’s June projections in brackets)
HICP-InflationGDP-Growth
20140.40.9
20150.2 (0.3)1.3 (1.5)
20161.1 (1.5)1.5 (1.9)
Contributors: M. Annunziata, E. Bartsch; A. Bosomworth; S. Broyer; J. Cailloux; J. Callow;, J. Henry, J. Krämer, F. Lindner, E. Nielsen

Majority stresses positive effects of the QE progamm

The majority of the members argued that the benefits of the bond purchasing programme outweigh its defects so far. The main arguments were that it helped to stabilize inflation expectations, lowered long-term interest rates and contributed to a lower exchange rate of the Euro. The depreciation of the Euro again helped to push up inflation a bit.

Another argument was that the purchases also stabilized bond markets and therefore made the Eurozone more robust against economic shocks as in the Greek crisis.

The opponents of QE stressed as main risks that it creates asset bubbles, reduces reform pressure and encourages questionable investment decisions. They also argued that the ultra-loose monetary policies in the US and the Eurozone have forced central banks in emerging markets to cut down interest rates to prevent a further appreciation of their currencies. This might have contributed to the sharp increase of private debt in emerging markets.

One member pointed out that the ultra-low interest rate policy of the ECB, together with its policy of increasing bank regulation and regulatory costs, was hurting the many small banks in Germany, which are crucial for its economic strength, and will likely force large numbers of mergers and closures of the Sparkasse and Volksbank-type banks, in turn reducing bank credit for GDP transactions and hence economic growth.  ngth, and will likely force large numbers of mergers and closures of the Sparkasse and Volksbank-type banks, in turn reducing bank credit for GDP transactions and hence economic growth.  

Many expect an extension of the QE progamme beyond September 2016

The falling Oil and commodity prices as well as the latest upward trend in the exchange rate of the Euro make it less likely that the ECB will meet its inflation target of around two percent by the end of 2016. That is why many members of the Shadow Council expect the ECB to extend its bond purchases beyond September 2016. One member even expects the ECB to increase the size of its monthly bond purchases already before that date. 

There was also the argument raised by some members that the ECB could  change the modalities of the program to increase its effectiveness. A possibility would be to link the bond purchases to the amount of outstanding bonds or to the level of interest rates in the Eurozone countries rather than to the ECB’s  capital key.  The rational: In countries like Germany the interest rates are already very low so the marginal effect would be higher if the purchases were more focused on countries with higher interest rates.  

Another suggestion was to focus the efforts more on writing down non-performing loans. One possibility mentioned was that the ECB could directly purchase non-performing loans from the banks. Another suggestion was to hand out transferable vouchers, which can be used to pay down bank debt. People without debt can sell the voucher to people with debt and banks can change these vouchers for reserves.

No need to act on interest rates

Members largely kept their rate recommendations unchanged from three months ago, with a very large majority in favour of unchanged rates.

 

Members’ individual votes on main refinancing rate (currently 0.05%):

MemberAffiliationRate recommendation 
José AlzolaThe Observatory GroupUnchanged 
Marco AnnunziataGeneral ElectricUnchanged 
Elga BartschMorgan StanleyUnchanged 
Andrew BosomworthPimcoUnchanged 
Sylvain BroyerNatixisUnchanged 
Willem BuiterCitigroupcut to -0.25 
Jacques CaillouxNomuraUnchanged 
Julian CallowCatalyst EconomicsUnchanged 
Eric ChaneyAxaUnchanged 
Janet HenryHSBCUnchanged 
Merijn KnibbeWageningen UniversityUnchanged 
Fabian LindnerIMKUnchanged 
Jörg KrämerCommerzbankhike to 0.25% 
Erik NielsenUnicreditUnchanged 
Richard WernerUniversity Southamptonhike to 0.25% 

Frankfurt, 29th August, 2015

Jan Mallien

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Most members argue in favour of QE

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