ECB Shadow Council Minutes Most Members support an increase of the PEPP
Growth and Inflation forecasts revised
Members of the ECB Shadow Council slashed their inflation forecasts for 2020 from 1.2 to 0.4 percent. They were also reducing their forecasts for 2021 from 1.4 to 1.1 percent and for 2022 from 1.5 to 1.3 percent.
The members also slashed their GDP forecasts for this year from 0.6 to minus 7.3 percent. By contrast the members revised their forecasts upward for 2021 from 1.3 to 5.7 percent and changed their forecast for 2022 from 1.4 to 1.9 percent.
| Shadow Council macroeconomic forecasts (ECB’s March projections in brackets) | ||
| HICP-Inflation* | GDP-Growth | |
| 2020 | 0.4 (1.1) | -7.3 (0.8) |
| 2021 | 1.1 (1.4) | 5.7 (1.3) |
| 2022 | 1.3 (1.6) | 1.9 (1.4) |
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. | ||
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Increase PEPP in terms of size and duration
Most members supported an increase of the PEPP programme by about 500 to 750 billion Euro. Many of them would also extend the duration of the programme by six to nine months. There were several reasons mentioned. One was that if the ECB continues to deploy the PEPP envelope at the current pace, it would be depleted by the end of September 2020.
Several members therefore argued that a pre-emptive increase would reduce uncertainty and calm the markets. Another reason was that the euro-area countries would probably issue large amounts of new debts to finance the current measures in the Corona crisis. Some members also suggested that the ECB should clarify that it will reinvest PEPP securities.
The Members also suggested some other measures to support the economy. Some argued that the ECB should also buy “fallen angels”, bonds that recently lost their investment grade rating and that are eligible collateral for refinancing purposes. One member proposed that the ECB should use its PEPP-program for yield curve control. This would mean that the deviation of member states’ government bond yields from a reference rate would be capped by the ECB. This could make the programme more efficient and might require lower purchase volumes.
A minority of the members had objections against an increase of the PEPP. This camp argued that this instrument had not been effective. They were worried about distortions of asset prices and financial stability risks associated with this policy. One member mentioned that the policy of the ECB already corresponded to the concept of Modern Monetary Theory. By contrast, others argued that ECB had still remained its independent.
Inflation outlook
Concerning inflation most members expected it to remain low over the next two to three years due to the economic downturn, higher unemployment rates and lower oil prices. They argued that there were a lot of warnings about higher inflation rates in the past, but they have been often proven to be wrong. Some members, on the other hand, argued that the current stimulus measures would ultimately lead to higher inflation. According to their view, there would be more money that chased fewer goods. It was also mentioned that the Corona crisis might enhance the trend of de-globalisation, which could also boost inflation.
| Member | Affiliation | Deposit rate |
| José Alzola | The Observatory Group | Unchanged |
| Marco Annunziata | Annunziata Advisors | Unchanged |
| Daniele Antonucci | Quintet Private Bank | Unchanged |
| Elga Bartsch | Blackrock | Unchanged |
| Andrew Bosomworth | Pimco | Unchanged |
| Sylvain Broyer | S&P Global Ratings | Unchanged |
| Jacques Cailloux | Rokos Capital | Unchanged |
| Julian Callow | Element Capital | Unchanged |
| Frederik Ducrozet | Pictet | Unchanged |
| Janet Henry | HSBC | Unchanged |
| Merijn Knibbe | Wageningen University | Unchanged |
| Jörg Krämer | Commerzbank | Unchanged |
| Thomas Mayer | Flossbach von Storch | Unchanged |
| Lucrezia Reichlin | London Busines School | Unchanged |
| Dirk Schumacher | Natixis | Unchanged |
| Katharina Utermöhl | Allianz | Unchanged |
Frankfurt, Germany
May 28th, 2020
Written by Jan Mallien
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