ECB's headquarters in Frankfurt.

The Shadow Council members see no need for the ECB to change its course to react to the situation in Italy.

(Foto: dpa)

ECB Shadow Council Council opts for an end to QE

Its members urged the European Central Bank to end quantitative easing and to ignore the political situation in Italy as much as possible.
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Growth Forecasts Revised Downwards

Compared to three months ago, members of the ECB Shadow Council kept their inflation forecasts unchanged at 1.6 percent for 2018, above the ECB's staff projections last March. Members also kept the forecast unchanged for 2019 at 1.5 percent and expect 1.6 percent on average for 2020.
The Shadow Council’s mean forecast for GDP growth was revised downwards from 2.3 percent to 2.2 percent for this year, below ECB staff projections from March. Members revised the forecast for 2019 downwards from 1.9 to 1.8 percent and kept the forecast for 2020 at 1.6 percent on average.

Shadow Council macroeconomic forecasts (ECB’s March projections in brackets)
HICP-InflationGDP-Growth
20181.6 (1.4)2.2 (2.4)
20191.5 (1.4)1.8 (1.9)
20201.6 (1.7)1.6 (1.7)
Contributors: M. Annunziata; A. Bosomworth; S. Broyer; W. Buiter; J. Callow; J. Krämer.

Concern about Italy
Shadow Council members expressed concern about the political situation in Italy. They expected that the new government will increase the fiscal deficit as it tries to deliver on its election promises. This, together with a more confrontational stance towards the EU and other euro members, could widen bond spreads and increase volatility. But a majority of members did not expect that the new government in Rome will put Italexit on the table. New elections could be held within the next 12 months, with a risk that the populist parties could gain an even larger majority of the vote. It was noted that the euro’s popularity has declined in Italy, while it has increased in other major member states like Germany and France, according to Eurobarometer. Apart from leading to higher spending, the increased political uncertainty in Italy could also bring about a depreciation of the euro, which could make it easier for the ECB to end QE. One Shadow Council member suggested the euro should be dissolved by a simultaneous exit from the eurozone by all member countries.

ECB should end QE
When it comes to monetary policy, most Shadow Council members stressed that the ECB should ignore Italy as much as possible. Some members suggested that the central bank should try to ring-fence other member states from possible contagion from Italy, for example, by stressing that the ECB is monitoring monetary conditions. It was noted that the forward guidance on rates would gain in importance as QE comes to an end. Therefore, the ECB could give more details on the timing of the first rate hike, for example, by making clear that rates would remain at their current levels for at least six months or so after net asset purchases end.

MemberAffiliationFixed rate        Deposit rate
José AlzolaThe Observatory GroupUnchanged       Unchanged    
Marco AnnunziataGeneral ElectricUnchangedUnchanged        
Elga BartschMorgan StanleyUnchangedUnchanged    
Andrew BosomworthPimcoUnchangedUnchanged       
Sylvain BroyerNatixisUnchangedUnchanged                  
Willem BuiterCitigroupUnchangedUnchanged                 
Jacques CaillouxRokos CapitalUnchanged   Unchanged                   
Julian CallowElement CapitalUnchangedUnchanged      
Janet HenryHSBCUnchangedUnchanged             
Merijn KnibbeWageningen UniversityUnchangedUnchanged      
Fabian LindnerIMK UnchangedUnchanged 
Jörg KrämerCommerzbank +0.25+0.25
Thomas MayerFlossbach von Storch
Lucrezia ReichlinLondon Busines School UnchangedUnchanged 
Richard WernerUniversity Southampton +0.5                   +0.5                   

Frankfurt, 8th June, 2018
Jan Mallien
Proofed by Jeremy Gray

Background information
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