Summary minutes of the meeting on November 29, 2007

On the occasion of its fifth anniversary the ECB Shadow Council met in London. The Council voted in favour of unchanged interest rates with a majority of 13 votes. Six members voted in favour of an immediate rate cut of 25 basis points to 3.75 percent. All but one member of the majority expressed some form of bias toward lower rates. There was near unanimity that the ECB should remove their own rate hike bias in their communication.

Many members have become significantly more sceptical regarding the economic outlook of the euro area since last month. The average forecast for growth next year declined to 1.7 percent from 1.9 percent previously. On the other hand, the average inflation forecast for 2008 also went to 2.2 percent from 2.0 percent previously.

CONSENSUS FORECAST OF THE ECB SHADOW COUNCIL (Last month's forecast in parentheses)

YearHICP-Inflation in %GDP-Growth in %
20072.1 (2.0)2.6 (2.6)
20082.2 (2.0)1.7 (1.9)

Forecasters: J. Alzola; L. Buttiglione; J. Cailloux; J. Callow; S. King; J. Escrivá; J. Fels; M. Heise; T. Mayer; V. Riches-Flores; J.M. Six

Five forecasters have assumed that the ECB key rate will remain at 4.0 percent for the next six months, four have assumed a rate cut to 3.75 percent.

The discussion was dominated by the economic outlook. Where was a broad consensus that inflation would come down again after the current spike to around three percent. Still, some members argued that it was not advisable to cut interest rates, at a time when actual inflation was running so clearly above target. These members feared that such a move might call the inflation fighting resolve of the ECB in question.

Members listed a number of factors that would act as brakes to the economic expansion. Those were the high value of the euro, high oil prices, less support form external demand and reduced availability of credit due to the problems of the banking sector.

Many members expressed the view that uncertainty regarding macroeconomic prospects was unusually high currently. Most drew the conclusion that the right thing for the ECB was to wait until the uncertainty has receded. Those who voted in favour of a rate cut argued that uncertainty was mostly concerning the severity of any slowdown in activity, while the slowdown itself was all but certain. These members argued that a rate cut which proved to be unnecessary later could easily be undone, while cutting rates letter would be less effective, if a cut was indeed needed. . Some members suggested that the ECB should try intervention, if possible concerted, to stop the appreciation of the euro. However, others were sceptical, saying that this would not do anything if rate policy was not changed accordingly.

Regarding the ECB’s money market steering activities one member suggested the ECB should narrow the corridor around the minimum bid rate, by raising the rate of marginal borrowing facility from three to 3.5 percent and cutting the marginal lending rate from five to 4.5 percent. No consensus was reached on this proposal, either. Other members preferred the generous provision of short and medium term liquidity.


INDIVIDUAL VOTES (Recommended rate change in percentage points)

Josè AlzolaCitigroup, Londonno change
Agnès Bénassy-QuéréCEPII, Pariscut 25 bp
Willem BuiterLondon School of Economics and Goldman Sachscut 25 bp
Luigi ButtiglioneFortress, Londonno change
Jacques CaillouxRoyal Bank of Scotland, Londonno change
Julian CallowBarclays Capital, Londonno change
Marie DironOcford Economicsno change
José Luis EscriváBBVA, Madridno change
Joachim FelsMorgan Stanley, Londoncut 25 bp
Daniel GrosCenter of European Policy Studies (CEPS), Brusselsno change
Michael HeiseDresdner Bank / Allianz, Frankfurtno change
Stephen KingHSBC, Londonno change
Thomas MayerDeutsche Bank, Londoncut 25 bp
Gernot NerbIfo-Institute, Munichno change
Thorsten PolleitECB-Observer, Frankfurtno change
Véronique Riches-FloresSociété Générale, Pariscut 25 bp
Jean-Michel SixStandard & Poor's, Londonno change
Angel UbideTudor Investment Corporation, Washington D.C.cut 25 bp
Charles WyploszGraduate Institute of International Studies, Genevano change

* In alphabetical order.

Internal affairs

The Shadow Council decided not to follow the ECB Governing Council in extending its membership size to 21. Rather the Shadow Council will reduce membership to 15. Where was broad consensus that a committee of 21 was far too large to allow for efficient decision making.

Tuesday, December 4, 2007
Norbert Haering, London

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