The ECB Shadow Council recommended, with a majority of 9 out of 15 votes, that the ECB Governing Council leave its key interest rate unchanged at 4 percent at its forthcoming policy meeting on February 7. Six members recommended a rate cut by 25 basis points, instead. Of the nine members who voted for unchanged rates, seven expressed a clear bias toward lower rates, one was neutral and one expressed a bias toward higher rates.
There was a broad consensus in the Shadow Council that the business cycle in the euro area had passed its peak and a significant slowdown was to be expected. Members cited strong decline in the Purchasing Manager Index (PMI) for the service sector and other indicators signalling weak domestic demand as evidence of a downturn in activity. Declining stock prices, cooling real estate markets, tighter credit conditions and slower foreign demand growth will be contributing – according to the consensus view – to a further weakening of aggregate demand. This view was reflected in further downside revisions of growth forecasts. The average growth forecast for 2008 decreased from 1.7 to 1.5 Percent. This is half a percentage point lower than the ECB staff forecast from December. In 2009 members expect growth to pick up only moderately again to 1.7 percent.
|CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL|
(Last month's forecast in parentheses)
|Year||HICP-Inflation in %||GDP-Growth in %|
|2008||2.4 (2.2)||1.5 (1.7)|
|2009||1.9 (1.8)||1.7 (2.4)|
Forecasters: J. Alzola; L. Buttiglione; 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 remain at 4.0 percent for the next three months, but decline to 3.75 percent within six months time.
The inflation forecast for 2008 went up further to 2.4 percent, almost closing the gap to the ECB’s latest projection of 2.5 percent. In 2009 members expect inflation to fall slightly, below the ECB’s upper limit of tow percent again, which is in line with the ECB’s projections. Underlying most of these forecasts is the assumption that the ECB key rate would stay at 4 percent for the next three months and go down to 3.75 percent within six months.
All but one member urged the ECB to give up their bias toward higher rates and prepare the public for the possible need to cut rates, instead. A large majority of members felt that rate cuts would probably ultimately be necessary. Several members even announced they would probably vote for such a recommendation as early as next month. Several members advocated delaying a rate cut, in order not to relieve pressure from wage negotiators during the ongoing wage round to come to moderate settlements. This view was contested by several other members. Some of these argued that a catch-up of wages was normal and justified after many years of subdued wage growth. Others argued that the ECB could not influence the negotiations anyway, or that it was not hte role of an independent central bank to interfere with wage negotiations in individual countries. Some members remarked that there was undue, if unspoken, emphasis by the ECB on developments in Germany in this respect. Other reasons given by individual members to delay a rate cut were to avoid giving a sense of panic and to gather some more evidence that a significant slowdown of growth and inflation was really to be expected.
One academic member remarked that he resented the pressure put on central banks by commercial bank to help them out of the problems they had gotten themselves into. Several members specifically said that monetary and credit data was currently considerably distorted and died not probide any reliable indication of inflation pressure. One member disagreed strongly with this view.
In keeping with its decision made in December the Shadow Council has only 15 voting members starting at this meeting. Since there are more than 15 members for a transition period, three members did not formally vote at this meeting. These members’ leanings on rates are documented in the footnote of the table below.
|INDIVIDUAL VOTES (Recommended rate change in percentage points)|
|Josè Alzola||Citigroup, London||cut 25 bp|
|Agnès Bénassy-Quéré||CEPII, Paris||no vote*|
|Willem Buiter||London School of Economics and Goldman Sachs||no vote*|
|Luigi Buttiglione||Fortress, London||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||no change|
|Joachim Fels||Morgan Stanley, London||cut 25 bp|
|Daniel Gros||Center of European Policy Studies (CEPS), Brussels||no change|
|Stephen King||HSBC, London||cut 25 bp|
|Thomas Mayer||Deutsche Bank, London||cut 25 bp|
|Gernot Nerb||Ifo-Institute, Munich||no vote*|
|Thorsten Polleit||ECB-Observer, Frankfurt||no change|
|Véronique Riches-Flores||Société Générale, Paris||cut 25 bp|
|Jean-Michel Six||Standard & Poor's, London||no change|
|Angel Ubide||Tudor Investment Corporation, Washington D.C.||cut 25 bp|
|Charles Wyplosz||Graduate Institute of International Studies, Geneva||no change|
*) Of the three non-voting members at this meeting Agnès Bénassy-Quéré argued in favour of a rate cut, Willem Buiter and Gernot Nerb in favour of unchanged rates.
Frankfurt, February 1, 2008