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ECB Shadow Council Minutes Members support further monetary easing

Most members of Handelsblatt’s Shadow ECB Council argued for a further moentary easing in December to address the low inflation.
11.12.2020 - 09:13 Uhr Kommentieren
Most members of Handelsblatt’s Shadow ECB Council advocate an expansion of the bond purchases and more attractive TLTRO conditions. Quelle: AFP
ECB Headquarters in Frankfurt

Most members of Handelsblatt’s Shadow ECB Council advocate an expansion of the bond purchases and more attractive TLTRO conditions.

(Foto: AFP)

They are advocating an expansion of the bond purchases concerning volume and duration and more attractive TLTRO conditions. Other possibilities mentioned include an increase of the tiering multiplier and the incorporation of “fallen angels” into the corporate bond purchases.

Growth and Inflation forecasts remain unchanged

Members of the ECB Shadow Council reduced their inflation forecasts for 2020 from 0.3 percent to 0.2 percent and for 2021 from 1.1 percent to 0.9 percent. They kept their forecast constant for 2022 at 1.3 percent. For 2023 they forecast 1.4 percent.

The members revised their GDP forecast for this year upward from minus 7.9 percent to minus 7.6 percent. They reduced their forecast for 2021 from 5.4 to 4.4 percent. For 2022 they expect on average a GDP growth rate of 3.2 percent and for 2023 a rate of 1.8 percent.

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Standort erkennen
    Shadow Council macroeconomic forecasts (September forecasts in brackets)
    20200.2 (0.3)-7.6 (-7.9)
    20210.9 (1.1)4.4 (5.4)
    20221.3 (1.3)3.2 (2.0)

    Contributors: D. Antonucci, M. Annunziata; S. Broyer; F. Ducrozet, J. Henry, J. Krämer, D. Schumacher, K. Utermöhl.

    *Harmonized Index of Consumer Prices, a weighted average of price indices of eurozone countries.

    Monetary Stance
    Most members of the Shadow Council support further monetary easing at the December meeting to address the chronically low inflation. A looser monetary policy would help to keep refinancing costs low in order to support the fiscal policy response to the crisis. A minority argued that the prospect of a coronavirus vaccine will make the economy recover anyway and that it would be better to look through the current economic slump.

    Bond purchases
    With regard to the instruments, the members spoke out in favor of expanding bond purchases. Most members favor an increase in the volume by around 500 to 600 billion euros and an extension of the duration until the end of 2021. Some also advocated an open end of the purchases and argued that the ECB should not be bounded by a deadline in order to have more flexibility. One member proposed the ECB should introduce yield curve control and give spread guidance. It was argued that this would make it possible to keep yields low and contain spreads without having to buy as many bonds as currently being done.

    More attractive TLTRO conditions

    In addition, most members are in favor of making the conditions of the Targeted Longer-Term Refinancing Operation (TLTRO) that the ECB provides for banks more attractive. Starting points would be a lengthening of the period in which banks can borrow at the most favorable rates, an increase in the borrowing allowance, an increase of the TLTRO maturity or a cut of the TLTRO minimum rate to -1.25%.

    Another possible measure could be to also buy corporate “fallen angels”, bonds that recently lost their investment grade rating. The ECB could also increase the tiering multiplier which exempts banks from negative rates on a part of their excess reserves.

    Members’ individual vote on the ECB’s deposit rate (currently minus 0.5 percent):

    MemberAffiliationDeposit rate        Asset Purchases
    José AlzolaThe Observatory GroupUnchanged       +500 bn.
    Marco AnnunziataAnnunziata Advisors Unchanged+500 bn.    
    Daniele AntonucciQuintet Private BankUnchanged+ 600 bn.
    Elga BartschBlackrockUnchanged+500 bn.
    Andrew BosomworthPimco
    Sylvain BroyerS&P Global RatingsUnchanged+500 bn. 
    Jacques CaillouxRokos CapitalUnchanged+ 500 bn.   
    Frederik DucrozetPictetUnchanged+ 500 bn.
    Janet HenryHSBCUnchanged+ 500 bn.  
    Jörg KrämerCommerzbank UnchangedUnchanged
    Thomas MayerFlossbach von StorchUnchangedUnchanged
    Dirk SchumacherNatixisUnchanged+ 500 bn.   
    Katharina UtermöhlAllianzUnchanged               + 500 bn.   

    Frankfurt, Germany
    December 9th, 2020
    Written by Jan Mallien

    Background information
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