Summary minutes of the meeting on June 26, 2008

The ECB Shadow Council decided with a majority of 11 members to recommend that the ECB leave its key rate unchanged at four percent at the next policy meeting on July 3. As the month before, one member voted in favour of a rate cut of 25 basis points instead. Three members voted in favour of a rate hike of 25 basis points, up from none a month earlier. Of the eleven members in favour of no change in rates, two expressed a bias toward higher rates, two a bias toward lower rates.

In the view of the Shadow Council, the ECB has more or less pre-announced a rate hike for July 3. Never in the five-year history of the Shadow Council has such an expected move of the ECB been so much at odds with the view of the Shadow Council.

The main factor behind the switching of three members to favouring a rate hike was a further deterioration of inflation expectations. The mean forecast of Shadow council members for inflation this year went up to 3.6 percent von 3,3 percent a month ago and 3,1 percent two months ago. The inflation forecast for 2009 also deteriorated to 2.4 percent.

20083.6 (3.3)1.6 (1.7)
20092.4 (2.2)1.3 (1.4)

The rate hike proponents made the point that central banks had to demonstrate to wage and price setters that they are not willing to tolerate sustained deviations of inflation from target, in order to prevent an unanchoring of inflation expectations. One member said that this signal would be highly credible as the rate hike would slow down demand at a time when growth was already moderating would. Another member noted that not acting in an environment of inflation around four percent would convey the signal that the ECB did not really care about inflation. It was argued that the growth costs in the short term of delivering price stability have gone up, and that this short term cost was unavoidable.

The majority, however, did not think this was a promising strategy. They argued that inflation would be unresponsive to the tightening of policy rates, as it is driven mainly by energy prices. As one rate hike would not achieve anything and the economy was to weak to take serious of rate hikes, it was considered by the majority best to leave rates unchanged and wait for the impending slowdown in demand to drive inflation back down.

Further, it was argued that firms are finding it increasingly difficult to pass on wage increases to consumers. Thus a wage-price spiral was not to be feared, as yet. Several members argued that the monetary policy stance was quite restrictive already, if the exchange rate, corporate lending rates and interbank rates were factored in.

There was a unanimous sentiment on the Shadow Council that the communication of the ECB regarding the announcement of a likely-rate hike on July 3 was rather unfortunate and inconsistent. While members agreed that a rate hike would in principle work as a credible signal to wage and price setters that no lasting inflation-overshoot would be tolerated. However, it was criticised by rate hike proponents and opponents alike that such a signalling-strategy was at odds with reassurances from the ECB that no series of rate increases was planed.

Members' individual votes:
Jose Alzola


no change
Agnes Benassy-QuereCEPIIno change
Willem BuiterLondon School

of Econ./ Goldman
hike 0.25
Jacques Cailloux


no change
Julian CallowBarclays Capitalno change
Giancarlo CorsettiEurop. Univ. Institutehike 0.25
Marie DironOxford Economicsno change
Daniel GrosCEPSno change
Stephen King


hike 0.25
Thomas Mayer

Deutsche Bank

no change
Gernot NerbIfo-Instituteno change
Veronique Riches-FloresSociete Generalecut 0.25
Jean-Michel SixStandard & Poor'sno change
Angel UbideTudorno change
Charles WyploszGrad. Institute. Genevano change

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