Many also think he would be better able to resist further overburdening of monetary policy. Some members also think Benoît Coeuré would be an excellent choice for the job. The members see several important challenges for the ECB in the coming years like policy normalization, a redesign of the monetary policy framework and the re-anchoring of inflation expectations around two percent.
Growth and Inflation forecast revised downward
Compared to three months ago, members of the ECB Shadow Council revised their inflation forecast down to 1.3 percent from 1.4 percent for 2019. Their forecasts were revised down by 0.1 percent respectively for 2020 and 2021 to 1.4 percent and 1.5 percent.
The Shadow Council revised its mean forecast for this year’s GDP growth down to 1.1 percent from 1.3 percent. Members revised down their 2020 forecast to 1.3 percent from 1.4 percent, and expect 1.4 percent on average for 2021.
|Shadow Council macroeconomic forecasts (ECB’s March projections in brackets)|
|2019||1.3 (1.2)||1.1 (1.1)|
|2020||1.4 (1.5)||1.3 (1.6)|
|2021||1.5 (1.6)||1.4 (1.5)|
Contributors: M. Annunziata; A. Bosomworth; S. Broyer; J. Callow; F. Ducrozet, J. Henry, J. Krämer, K. Utermöhl.
*Harmonized Index of Consumer Prices, a weighted average of price indices of eurozone countries.
Weaker Economic Outlook
Concerning the short-term economic outlook, members stressed the high degree of uncertainty for the euro-area due to risks related to trade, Brexit and Italy. The data show that this is a drag for the economy. Recently, inflation expectations have been slipping and purchasing manager index (PMI) numbers for manufacturing in the euro-area have been very disappointing. It was pointed out that there is a large difference between soft data, like the PMI’s, and hard data. One member pointed out that hard data like growth for Q1 were better than expected and that one should not overinterpret the weak PMI’s. Other members, by contrast, expect that the positive surprises for growth in Q1 will be offset by negative surprises in Q2.
It was mentioned that the weaker growth outlook should be reflected in the pricing for the new Targeted Longer-Term Refinancing Operation (TLTRO III). One member warned that there could be a tightening of financial conditions, if the rate was above the ECB’s main refinancing rate (MRO), which is now at zero percent. Several members were in favour of a spread between -20 basis points and -40 basis points. Some members said that there was no monetary case for the new TLTRO’s because credit has been on average still growing in the euro-area. The problem is that credit growth is diverging among euro member states. The main outlier is Italy where lending to business for example is contracting.
Selection criteria for next ECB president
Concerning the selection of the next ECB president, it was pointed out that it should be based on academic, management and people skills. Draghi’s successor would also have to possess strong skills in consensus building and communication. He or she should have an open mind for unconventional policies in a crisis situation and publicly commit to the ECB’s role as lender of last resort.
Members see several important challenges for the ECB in the coming years. One is policy normalization. This includes forging a consensus in the council for possible rate hikes and setting the optimal size and duration of the ECB balance sheet. Some members said that this will be difficult because Eurozone countries will probably show diverging economic performances. Others see this as the easier part in the sense that the ECB will only be in a position to raise rates, if the economic outlook improves and core inflation grinds higher. Another challenge would materialize, if the ECB needs to cushion a new downturn when policy rate are already negative. Other challenges mentioned were the redesign of the monetary policy framework and the task to prevent inflation expectations from slipping below two percent.
Several members said that they think Jens Weidmann would be the best candidate to become the next ECB president. They think he is more experienced and qualified than many others. And he might also be more willing to resist further overburdening of monetary policy. Other members by contrast were more sceptical because they think that Weidmann might be too dogmatic in a crisis situation. Some members also said that Benoît Coeuré would be an excellent choice, but the legal obstacles for his nomination would be high.
|Member||Affiliation||Fixed rate||Deposit rate|
|José Alzola||The Observatory Group||Unchanged||Unchanged|
|Marco Annunziata||Annunziata Advisors||Unchanged||Unchanged|
|Sylvain Broyer||S&P Global Ratings||Unchanged||Unchanged|
|Jacques Cailloux||Rokos Capital||Unchanged||Unchanged|
|Julian Callow||Element Capital||Unchanged||Unchanged|
|Merijn Knibbe||Wageningen University||+0.25||+0.25|
|Thomas Mayer||Flossbach von Storch||+0.25||+0.4|
|Lucrezia Reichlin||London Busines School||Unchanged||Unchanged|
June 3rd, 2019
Written by Jan Mallien