Shadow ECB
Council sees ECB’s options reduced to a largely symbolic rate cut

At the meeting of the Shadow ECB Council on 29 June 2012, 13 of the 15 members recommended a cut of the ECB’s main refinancing rate by 0.5 percentage points to 0.5 per cent.
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A month earlier, only nine had suggested a large rate cut and three a quarter point cut. Most members think that the effect of such a rate cut will be rather limited and mostly symbolic. Two members think it would hurt more than help.       

Recession ahead

For the euro area on average, members continue to expect a contraction in real GDP this year (-0.4%). Growth expectations for next year continued to edge down and now stand on an average of 0.6 percent.  Inflation is expected to fall below two percent next year.

 

Shadow Council macroeconomic forecasts (Forecast means in %, previous forecasts in brackets)

 HICP-InflationGDP-Growth
20112.71.5
20122.3 (2.3)-0,4  -(0.4)
20131.7 (1.8)0.6  (0.7)

 Contributors: M. Annunziata, M. Balmaseda; E. Bartsch; J. Cailloux; J. Callow; E. Chaney, M. Diron, G. Horn; J. Krämer, E. Nielsen, J.-M. Six

 

Lower rates needed

Members agreed that the outlook for growth in the euro area deteriorated markedly in the last six to eight weeks, while at the same time tensions in financial markets had intensified. Therefore, the number of members arguing for a large cut of half a percentage point of the main refinancing rate increased strongly from nine to thirteen. Only two members opposed a rate cut on the premise that it would not be effective in stimulating the economy (an additional argument by one member was that a rate cut might hurt the economy by depressing the income of savers).  

However, according to the majority opinion, the ECB should not only cut the main refinancing rate by half a point, but also the deposit rate by a quarter point to zero. A few members even argued in favour of a slightly negative deposit rate.

While most members held limited expectations about the efficacy of rate cuts in the current situation, a large majority considered it essential that the ECB do what it can to ameliorate the situation. Of the expected effects of a rate cut, members considered the following most important for alleviating the crisis (i) banks in crisis countries, which do most of the borrowing from the ECB, would save money on borrowing from the Eurosystem; (ii) the external value of the euro would go down, making European producers more price competitive on international markets; (iii) a reduction of the deposit rate could induce banks with ample reserves to lend more to other banks rather than depositing funds at the ECB. That said, members did not consider it very likely that lower interest rates would be passed on to borrowers.

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Council sees ECB’s options reduced to a largely symbolic rate cut

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No majority for more unconventional policy measures at the current time

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Background information

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