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ECB SHADOW COUNCIL MINUTES Most Members opt for rate cut and specific TLTROs

The members of Handelsblatt’s Shadow ECB Council expect that the Coronavirus outbreak will significantly reduce growth in the euro-area this year. A majority therefore supports a rate cut and specific Targeted-Longer-Term Refinancing Operations (TLTROs).
09.03.2020 - 18:15 Uhr Kommentieren
The economic impact of the Coronavirus on the euro-area economy is unclear. Quelle: dpa
ECB Headquarters in Frankfurt

The economic impact of the Coronavirus on the euro-area economy is unclear.

(Foto: dpa)

Growth and Inflation forecasts remain unchanged

Members of the ECB Shadow Council were still keeping their inflation forecasts at 1.2 percent for 2020 as three months ago. They were also keeping their forecast for 2021 at 1.4 percent. For 2022, they foresaw an inflation rate of 1.5 percent.
The members significantly reduced their GDP forecasts for this year from 1.0 to 0.6 percent. The members maintained their 2021 forecasts at 1.3 percent and their 2022 forecasts at 1.4 percent.

Shadow Council macroeconomic forecasts (ECB’s December projections in brackets)
HICP-Inflation*GDP-Growth
20201.2 (1.1)0.6 (1.1)
20211.4 (1.5)1.3 (1.4)
20221.5 (1.6)1.4 (1.4)

Contributors: D. Antonucci, M. Annunziata; A. Bosomworth; J. Callow; F. Ducrozet, J. Krämer, D. Schumacher, K. Utermöhl.

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

Economic Outlook deteriorated significantly

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Standort erkennen

    It was acknowledged that the economic outlook for the euro-area deteriorated significantly because of the Coronavirus outbreak. This had already led to much weaker sentiment indicators. The negative shock would probably affect both the supply and demand sides. Several members expected that the peak of the Coronavirus related problems would be reached in April. Some expected a V-shaped recovery, while others a U- shaped recovery. One member mentioned that there is a high risk that Germany, France and Italy would slip into a technical recession or at least register negative GDP growth in the first half of the year for one quarter.

    Several members said that there would be some pretty ugly numbers in the forthcoming months. There was also a discussion whether the Euro-Area or the US would be more affected by the virus. It was argued that the US might be more exposed to it because many people do not have an insurance and would only show up at the doctor when they are very ill. In addition automatic stabilizers were more pronounced in Europe. On the other hand, in the US it is easier for the government and the Federal Reserve to react to a possible economic crisis.

    Monetary Easing

    On policy, most members supported action from the ECB. There were different opinions about the right answer to the current situation. A large majority supported some form of specific TLTROs targeting SME lending. The ECB should ensure the flow of credit and ample liquidity conditions. A majority also supported a cut of the deposit rate by 10 basispoints. One argument in favor of it was that this would have a positive confidence effect for financial markets.

    It was also mentioned that this would help to ease credit conditions, since banks would have higher incentives to grant loans via TLTROs. Another argument also in favor of a rate cut was that it could bring the appreciation of the Euro to an end, because it would stem the unwinding of carry-trades funded in Euro. Some members supported to raising the monthly net purchases of bonds to 30 till 40 billion Euro.

    Fiscal stimulus needed

    Several members emphazised that fiscal policy should be in the lead when responding to the weak economic situation. Fiscal rules should be loosened and policy makers should let automatic stabalizers work.

    Background information
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