Frankfurt am MainFive favoured a quarter point cut to 0.5 per cent. Two members argued in favour of unchanged rates. Most members see a need for the ECB to go beyond cutting rates and embrace more aggressive and unconventional measures to kick-start bank lending and to get the economy out of recession.
GDP expected to barely recover to 2011-levels by 2014
Members further reduced their forecasts for growth and inflation this year and next. After a decline of 0.5 per cent in 2012 and 0.4 per cent in 2013 members on average expect 0.8 per cent GDP growth in 2014, barely taking the economy back to the level of 2011. Inflation is expected to fall to 1.7 per cent this year and further to 1.6 per cent in 2014. These changes bring the average forecasts of the Shadow Council roughly in line with ECB staff projections published in March.
Shadow Council macroeconomic forecasts (Forecast means in %, previous forecasts in brackets)
|2013||1.7 (1.8)||-0.4 (-0.2)|
|2014||1.6 (1.7)||0.8 (1.0)|
Contributors: M. Annunziata, M. Balmaseda; E. Bartsch; S. Broyer; J. Cailloux; J. Callow; E. Chaney, M. Diron, J. Krämer, E. Nielsen, J.-M. Six
Rates near zero and more aggressive measures needed
In light of the record level of unemployment in many countries and in the euro area as a whole, the decline of inflation, which is projected to continue, and an expected second year of shrinking euro area GDP, a very large majority (13 out of 15) favoured a cut of the Main Refinancing Rate, which the ECB last lowered to 0.75 per cent in July 2012. A majority of eight members argued for a large rate cut of half a percentage point.
Several members made the point that the deposit rate, currently at zero, should not be lowered with the main refinancing rate. They argued, the narrowing of the spread between the two rates would reduce the disadvantage of banks in troubled countries, which have to borrow at the main refinancing rate, while stronger banks can borrow at money market rates, which tend to be close to the deposit rate.
Two members said rates should be left unchanged. One of these argued that there was no empirical evidence that a rate cut would reliably promote growth. This member argued that the important thing was to revive bank lending, which could not be done by lowering rates. Another member argued in favour of unchanged rates on the grounds that a prolonged period of abnormally low rates was distorting economic incentives.
However, even most of those members who advocated a rate cut did not expect it to result in a large impact on bank credit and on the economy. Many members therefore urged the ECB to consider more aggressive and innovative measures to kick-start depressed bank lending. One such measure which received considerable support was to offer a five-year Long Term Refinancing Operation and make it conditional on the provision of credit to small and medium enterprises, as these were considered to be severely credit constrained in a number of countries. The objection was raised, however, that a similar program of the Bank of England was not very successful.
Members’ individual votes:
|José Alzola||The Observatory Group||cut 0.25%|
|Marco Annunziata||General Electric||cut 0.5%|
|Manuel Balmaseda||CEMEX||cut 0.25%|
|Elga Bartsch||Morgan Stanley||cut 0.25%|
|Andrew Bosomworth||Pimco||cut 0.5%|
|Sylvain Broyer||Natixis||cut 0.5%|
|Jacques Cailloux||Nomura||cut 0.5%|
|Julian Callow||Barclays Capital||cut 0,5%|
|Eric Chaney||Axa||cut 0.5%|
|Janet Henry||HSBC||cut 0.25%|
|Merijn Knibbe||Wageningen University||cut 0.5%|
|Erik Nielsen||Unicredit||cut 0.5%|
|Jean-Michel Six||Standard & Poor's||Cut 0,25%|
|Richard Werner||University Southampton||unchanged|
Frankfurt, 26 April, 2013
Non-voting Chair of the Shadow ECB Council