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ECB Shadow Council Minutes Members warn of overburdening the ECB

Most members of Handelsblatt’s Shadow ECB Council argued for no policy changes. They see no need for an immediate reaction to the announced strategy shift of the Federal Reserve.
08.09.2020 - 21:56 Uhr Kommentieren
Some members of the ECB Shadow Council expressed concerns about the recent rise of the exchange rate of the Euro. Quelle: dpa
ECB Headquarters in Frankfurt

Some members of the ECB Shadow Council expressed concerns about the recent rise of the exchange rate of the Euro.

(Foto: dpa)

Growth and Inflation forecasts revised

Members of the ECB Shadow Council kept their inflation forecasts constant for 2020 at 0.3 percent and for 2021 at 1.1 percent. However, they were reducing their forecast for 2022 compared to three months earlier from 1.4 percent to 1.3 percent. The ECB June projections foresee inflation for 2020 at 0.3 percent, for 2021 at 0.8 percent and for 2022 at 1.3 percent.
The members were also reducing their GDP forecasts for this year from minus 7.0 percent to minus 7.9 percent and for 2021 from 5.5 percent to 5.4 percent. By contrast the members revised their forecasts upward for 2022 from 1.8 to 2.0 percent. The ECB June projections foresee GDP growth for 2020 at minus 8.7 percent, for 2021 at 5.2 percent and for 2022 at 3.3 percent.

Shadow Council macroeconomic forecasts (ECB’s June projections in brackets)
HICP-Inflation*GDP-Growth
20200.3 (0.3)-7.9 (-8.7)
20211.1 (0.8)5.4 (5.2)
20221.3 (1.3)2.0 (3.3)

Contributors: D. Antonucci, M. Annunziata; A. Bosomworth; S. Broyer; J. Callow; 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
Concerning the current monetary stance, most members argued for no changes. Some members expressed concerns about the recent rise of the exchange rate of the Euro and especially the speed of this appreciation. They said that this could be addressed by a verbal intervention, while others suggested that words would not be enough and action might be required in one of the next meetings.

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Standort erkennen

    It was argued that the main instrument to address the exchange rate would be a further cut of the deposit rate. Two members said that the ECB should indicate its openness for such a move. This measure could be combined with an increase of the tiering multiplier to cushion negative effects of more negative rates for banks.

    Implications of the Fed’s strategy shift
    The members were divided about the impact of the recently announced strategy shift of the Federal Reserve (Fed). In its new strategy the Fed puts more weight on bolstering the labor market and less on worries about too high inflation. Several members stressed that the ECB already conducted some subtle changes to its framework by emphasizing the symmetry of its inflation target and its medium-term perspective. They argued that this means that the ECB is already operating in a framework similarly to the Fed.

    Others warned that the strategy shift of the Fed could lead to a further depreciation of the Dollar vis-à-vis the Euro, if markets expect a looser monetary policy stance in the US than in Europe. Therefore, the ECB should avoid this impression. One member argued that the ECB would need a more radical strategy shift. He argued for a scheme of monetary control.

    Mandate
    Regarding its secondary mandate to support EU economic policies, most members said that the ECB should focus itself on its primary mandate of securing price stability. It was argued that it should not overburden itself with other tasks and raise expectations which it cannot meet. One member said it could stress its secondary objectives more in its communication when it addresses the broader public rather than to financial experts.

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

    MemberAffiliationDeposit rate        Asset Purchases
    José AlzolaThe Observatory GroupUnchanged       Unchanged   
    Marco AnnunziataAnnunziata Advisors UnchangedUnchanged   
    Daniele AntonucciQuintet Private BankUnchangedUnchanged   
    Elga BartschBlackrockUnchanged+500 bn.
    Andrew BosomworthPimco+ 50 bpUnchanged   
    Sylvain BroyerS&P Global RatingsUnchangedUnchanged   
    Jacques CaillouxRokos CapitalUnchangedUnchanged   
    Julian CallowElement CapitalUnchangedUnchanged   
    Frederik DucrozetPictetUnchangedUnchanged   
    Janet HenryHSBCUnchangedUnchanged   
    Jörg KrämerCommerzbank 
    Thomas MayerFlossbach von Storch
    Dirk SchumacherNatixisUnchangedUnchanged   
    Katharina UtermöhlAllianzUnchanged               Unchanged   

    Frankfurt, Germany
    September 4th, 2020
    Written by Jan Mallien

    Background information
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