Of these, two favoured a cut by 0.5 percentage points to 0.25 per cent, the others preferred a quarter-point cut to 0.5 per cent. One member argued in favour of a rate hike, one other regards the rate as irrelevant and would leave it unchanged. The majority of members would leave the deposit rate unchanged at zero per cent, while three argued in favour of a cut of this rate into negative territory. A majority supported the general plan for a new round of bond purchases by the ECB that was sketched out on 2 August.
Extended recession seen as likely
Growth expectations for 2013 deteriorated significantly. They now stand on an average of 0.2 per cent, which would not suffice to take GDP back to the level of 2011 after a projected drop of 0.5 per cent this year. Inflation is expected to fall below two per cent next year. The forecast for 2012 and 2013 combined is for negative growth of 0.3 per cent, while the ECB in its June projection had pencilled in growth of 0.9 per cent for the two years combined.
Shadow Council macroeconomic forecasts
(Forecast means in %, previous forecasts in brackets)
|2012||2.4 (2.4)||-0,5 -(0.4)|
|2013||1.7 (1.7)||0.2 (0.6)|
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
A large majority favoured a cut of the main refinancing rate, which the ECB last lowered to 0.75 per cent in July. While the expectations are limited that this would give a boost to the faltering economy directly, most members expect it to contribute to a lower external value of the euro and also to improve the financial situation of banks, and in particular of banks which have to rely most heavily on ECB funding.
Most of the proponents of a cut in the main refinancing rate would leave the deposit rate, at which banks can deposit excess reserves at the ECB, at zero. They fear that taxing excess reserves could lower the level of liquidity in the system and that it would create a rather unusual situation with possible unexpected and unwanted effects. Three members however, proposed lowering the deposit rate, arguing that this would incentivize banks to lend out excessive funds and that it would be very effective in pushing down the euro.
Two members opposed a rate cut on the premise that it would not be effective in stimulating the economy and might hurt even the economy by depressing the income of savers. One of these two voted in favour of reversing the last rate cut and raising the main refinancing rate.
Support for a new bond buying programme
A majority of members supported the new bond buying programme of the ECB as preliminarily outlined by the ECB president on 2 August. They share the diagnosis that speculation on a possible break-up of the currency union was driving up bond yields of countries like Spain and Italy and that the ECB’s task was to counter such speculation. There was also widespread support for the condition that the ECB would only buy bonds from countries which have negotiated a reform programme with the EFSF or the ESM and have asked for support from one of these institutions. The plan of buying short dated government bonds only was supported by the majority on the grounds that this would clearly signal the short-term nature of the ECB’s engagement.
There was a consensus on the Shadow Council that for the programme to work as planned, the ECB should not set any limit to the volume of purchases and should act forcefully once they started to buy. Setting and communicating a concrete upper limit to bond yields was generally considered a bad idea. Members judged that such a rule bound and transparent policy would invite financial market participants to engage into one-way speculation against the central bank.
Some members argued in favour of a bond buying programme with little conditionality. These members contended that markets would keep speculating against countries if there remained the risk that the ECB might judge reform efforts as insufficient and stop intervening. In a similar vein, the self-imposed restriction to only buy short-term securities was criticised as limiting the effectiveness of any intervention.
Some other members opposed new bond purchases outright on fundamental considerations. Their arguments revolved around the concern that this amounted to mixing monetary and fiscal policies responsibilities. They pointed out that the broken transmission mechanism was not entirely due to monetary or financial reasons, for which the central bank was responsible, but rather due to the design features of the monetary union for which the political agents are responsible. Buying bonds and would thus undermine the political independence of the ECB, according to this view.
Other unconventional policy measures not currently needed
None of the member saw a pressing need to (re-)introduce other elements of unconventional policy like new very long term refinancing operations or a further loosening of collateral requirements.
Members’ individual votes:
|José Alzola||The Observatory Group||n.a.|
|Marco Annunziata||General Electric||cut 0.5%|
|Manuel Balmaseda||CEMEX||cut 0.25%|
|Elga Bartsch||Morgan Stanley||cut 0.25%|
|Andrew Bosomworth||Pimco||cut 0.25%|
|Jacques Cailloux||Nomura||cut 0.5%|
|Julian Callow||Barclays Capital||cut 0.25%|
|Eric Chaney||Axa||cut 0.25%|
|Janet Henry||HSBC||cut 0.25%|
|Gustav Horn||IMK, Düsseldorf||cut 0.25%|
|Merijn Knibbe||Wageningen University||cut 0.5%|
|Jörg Krämer||Commerzbank||Hike 0,5%|
|Erik Nielsen||Unicredit||cut 0.25%|
|Jean-Michel Six||Standard & Poor's||n.a.|
|Richard Werner||University Southampton||unchanged|
Frankfurt, 31. August, 2012
Non-voting Chair of the Shadow ECB Council