Shadow ECB Council Sees Little Need for the ECB to Move toward the Exit

At the meeting of the Shadow ECB Council on 28 October a three-fifths majority of members supported a continuation of full-allotment at the ECB?s refinancing operations well into next year and favoured keeping open the option for the ECB to purchase government bonds in the event of substantial market dislocation. No member suggested a rate change but four members expressed a bias toward lower rates, unchanged from a month ago.

Members forecasts for growth and inflation

Shadow Council members expect inflation to converge from below toward the ECB?s goal of "below but close to two percent" by 2012. Growth is expected to remain lacklustre, with an average forecast of 1.6 percent in 2012.

Shadow Council Macroeconomic Forecasts

20101.6 %1.5%
20111.4 %1.7 %
20121,6 %1,8 %

Contributors:. M. Annunziata; A. Bosomworth; E. Bartsch; J. Cailloux; J. Callow; M. Diron, J. Henry, G. Horn, .J. Krämer; T. Mayer; E. Nielsen; J.-M. Six

Assumptions: All forecasters assumed that the ECB would leave its key rate at 1% for the next six months.

On the timing of the ECB?s exit from extraordinary liquidity provision and bond purchases

At the latest meeting of the Shadow Council, the main focus of the debate was whether to continue the special liquidity provisions for banks and the ECB?s Securities Market Programme (SMP, for the purchase of government bonds). A three-fifths majority argued in favour of continuing both special liquidity operations and the SMP.

Those Shadow Council members who favoured immediate discontinuation of the special liquidity provisions for banks and for closure of the SMP argued that the only justification for the SMP was to bridge the gap until the European Financial Stability Mechanism (EFSM) was operational. With the EFSM now in place, member countries who could not refinance themselves on the capital market any more should go to the EFSM, it was argued.

As well, these members proposed an announcement that the full-allotment procedure would be phased out early next year, first going back to the fixed-allotment, variable rate procedure for three-month refinancing operations and later also for the weekly operations. They argued that liquidity provision for banks and interest rate policy were different tools with different goals. If more stimulus was needed, it should come in the form of lower rates, these members argued. They also observed that full-allotment was a crisis measure and that the acute crisis was over. Now, they argued, it was incumbent on governments to ensure that weak financial institutions were either recapitalized or closed. Those governments who did not have the means to do so could go to the EFSM, it was argued.

However, the small majority of Shadow Council members who argued in favour of a continuation of the current measures concerning the provision of liquidity and keeping the SMP open argued that the contagion risk was still high, which meant that if one country went to the EFSM, then without the SMP there would be no tool available to reign in unwarranted speculation against the bonds of countries with problematic fiscal positions. They argued that a statement that the SMP had been closed could lead to a spike in interest rate spreads of bonds of peripheral countries and could thereby precipitate a new crisis. These members considered that the SMP was a valuable tool which helped to prevent a potential new bout of contagious market pessimism.

As well, these members argued in favour of continuation of the full-allotment procedure at the refinancing-rate of one percent for the ECB?s refinancing operations with banks. Here, they argued that the financial system as a whole was still rather fragile and could be severely hurt if refinancing was made significantly more difficult by the ECB,. They also argued the recovery was still fragile, particularly given that governments were about to cut spending in many countries. Furthermore, these members considered it imprudent for the ECB to go in the opposite direction of the US Federal Reserve, which is widely expected to announce new measures of large scale liquidity creation shortly. This could drive up the value of the euro and cause dislocations in financial markets, it was argued.

Rate recommendation

There was unanimity that the ECB should not change interest rates at the next policy meeting on 4 November and no member expects a rate hike to become appropriate within the next three months. Four members expressed a bias toward lower rates. This was unchanged from a month ago. These members argued that a fragile recovery in Europe combined with a slowdown in global growth and a strengthening Euro might very well make more monetary stimulus necessary.

Members' individual votes for 4. November

Jose AlzolaThe Observatory Groupno change
Marco Annunziata


no change
Elga Bartsch

Morgan Stanley

no change
Andrew BosomworthPimcono change *
Manuel Balmaseda


no change
Jacques Cailloux


no change*
Julian CallowBarclays Capitalno change *
Marie DironOxford Economicsno change
Janet Henry


no change
Gustav HornIMK Macroeconomic Policy Instituteno change*
Jörg Krämer


no change
Thomas Mayer

Deutsche Bank

no change
Erik NielsenGoldman Sachsno change
Jean-Michel SixStandard & Poor\'sno change
Angel UbideTudorno change

*) Bias toward lower rates

Frankfurt 29 October 2010
Norbert Häring
Non-voting Chairman

Background information

The ECB Shadow Council was founded in 2002 upon an initiative of Handelsblatt, the German business and financial daily. It is an unofficial panel, independent of the ECB/Eurosystem, and comprising fifteen prominent European economists drawn from academia, financial institutions, consultancies and research institutes. The Shadow Council usually convenes by telephone conference on a monthly basis (though in November it holds a physical meeting). Its discussions take place a week before the monthly official ECB Governing Council "policy" meetings, and are intended to formulate an opinion as to what monetary policy decision its members believe that the ECB's Governing Council ought to undertake, both at its forthcoming meeting and also on a three month horizon.

Shadow Council members are encouraged to submit their own economic projections for euro area activity and inflation on a monthly basis, which constitutes the panel's forecast consensus as published each month. The Shadow Council's discussions and recommendations differ from surveys of economists concerning the outlook for ECB interest rates because the Shadow Council recommendation expresses the majority view of its' members opinion about what the ECB should do, rather than what they forecast it to do (and hence the "normative" views as expressed by Shadow Council members on what they consider the ECB ought to do can and often do differ from what they might say they expect the ECB to do). This "normative perspective can, however, give an early indication of shifts in the balance of opinion in the expert community, as can be seen by comparing the historic recommendations of the Shadow Council against subsequent decisions undertaken by the ECB Governing Council.

Members of the Shadow Council base their recommendations on the ECB's objectives as defined under the EU Treaty, though Shadow Council members do not necessarily adopt exactly the ECB's specific interpretation of its mandate: most Shadow Council members consider that a medium term inflation objective of two percent with a symmetric tolerance band around it would be clearer, more realistic and more appropriate than the definition adopted by the Governing Council, which defines price stability as an inflation rate of "below, but close to, two percent", in the medium term.

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