The ECB Shadow Council recommended, with a slim majority of 8 out of 15 votes, that the ECB Governing Council leave its key interest rate unchanged at 4 percent at its forthcoming policy meeting on March 3. Seven members recommended a rate cut by 25 basis points, instead. Of the eight members who voted for unchanged rates, most expressed a clear bias toward lower rates, one expressed a strong bias toward higher rates. While the number of proponents of a rate cut increased only by one, several members joined this camp, while several others switched into the camp of those arguing for no change.
There was disagreement on whether the outlook for the real economy had improved or worsened. Several members focused on recent indicators, mostly business surveys, indicating that the slowdown in activity was only gradual. Others noted that the international picture, namely the prospects of the US economy had become clearer, on the negative side. On average forecasts for growth this year and next remained largely unchanged. At 1.5 percent the average growth forecast was half a percentage point below the latest ECB projections from December.
|CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL|
(Last month's forecast in parentheses)
|Year||HICP-Inflation in %||GDP-Growth in %|
|2008||2.6 (2.4)||1.5 (1.5)|
|2009||1.9 (1.9)||1.8 (1.7)|
Forecasters: J. Alzola; J. Cailloux; J. Callow; S. King; J. Fels; T. Mayer; V. Riches-Flores; J.M. Six
Most forecasters have assumed that the ECB key rate will be between 4.0 and 3.75 percent druing for the next three months, and decline to between 3.75 percent and 3.5 percent by late summer.
As regards inflation, forecasts for this year moved up further. Several members said that before supporting a rate cut they would need to see the inflation rate coming down markedly from its current rate of more than 3.2 percent and be sure that it has really peaked. Others relied more on forecasts of inflation declining below two percent again in 2009, helped by a decline in demand.
Several members from both camps noted that the rise of the Euro, who had just broken through 1.50 dollar, was going to help reduce inflation pressure and was going to dampen dmand. One member suggested that the ECB should take a softer stance, more in line with other central banks like the Federal Reserve and the Bank of England, because otherwise the Euro would appreciate further to the point of inflicting damage to the economy. Members were divided regarding the assessment of financial developments. One group focused on ongoing strong credit growth, concluding that banks were not curtailing their lending in response to the subprime credit crisis. Others conceded that the process of credit tightening was slow, but insisted that the worst was yet to come. They considered a significantly more restrictive stance of the banks in the future as a near certainty, given their large losses. One member said he was not voting for a cut mainly because cutting rates would allow banks to get new capital on the cheap, which would amount to bailing them out after they had lost a lot of money due to careless behaviour. Most other members disagreed, saying that the ECB should do what was appropriate for the economy. They insisted that dealing with reckless behaviour of banks was the responsibility of regulators and supervisors.
In keeping with its decision made in December the Shadow Council has only 15 voting members as of January 2008. Since there are still 17 members for a transition period two members did not formally vote at this meeting. These members’ leanings on rates are documented in the footnote of the table below. Luigi Buttiglione left his position at Fortress and the Shadow Council.
|INDIVIDUAL VOTES (Recommended rate change in percentage points)|
|Josè Alzola||Citigroup, London||cut 25 bp|
|Agnès Bénassy-Quéré||CEPII, Paris||cut 25 bp|
|Willem Buiter||London School of Economics and Goldman Sachs||no change|
|Jacques Cailloux||Royal Bank of Scotland, London||no change|
|Julian Callow||Barclays Capital, London||no change|
|Giancarlo Corsetti||European University Institute, Florence||no change|
|Marie Diron||Ocford Economics||cut 25 bp|
|Joachim Fels||Morgan Stanley, London||cut 25 bp|
|Daniel Gros||Center of European Policy Studies (CEPS), Brussels||*)|
|Stephen King||HSBC, London||cut 25 bp|
|Thomas Mayer||Deutsche Bank, London||cut 25 bp|
|Gernot Nerb||Ifo-Institute, Munich||no change|
|Thorsten Polleit||ECB-Observer, Frankfurt||no change|
|Véronique Riches-Flores||Société Générale, Paris||*)|
|Jean-Michel Six||Standard & Poor's, London||cut 25 bp|
|Angel Ubide||Tudor Investment Corporation, Washington D.C.||no change|
|Charles Wyplosz||Graduate Institute of International Studies, Geneva||no change|
*) Of the two non-voting members at this meeting Véronique Riches-Flores argued in favour of a rate cut, Daniel Gros in favour of unchanged rates.
Frankfurt, February 29, 2008