Concerning the designing of a new (Targeted) Longer-Term Refinancing Operation most members argued for a shorter maturity and flexible rates. The members also see the need to change the forward guidance.
Growth forecast strongly revised downward – Inflation expected to fall
Compared to three months ago, members of the ECB Shadow Council revised their inflation forecast down to 1.4 percent from 1.6 percent for 2019. Their forecast for 2020 was unchanged at 1.5 percent and members expect 1.6 percent on average for 2021.
The Shadow Council revised its mean forecast for this year’s GDP growth down to 1.3 percent from 1.5 percent. Members revised down their 2020 forecast to 1.4 percent from 1.5 percent, and expect 1.5 percent on average for 2021.
|Shadow Council macroeconomic forecasts (ECB’s December projections in brackets)|
|2019||1.4 (1.6)||1.3 (1.7)|
|2020||1.5 (1.7)||1.4 (1.7)|
|2021||1.6 (1.8)||1.5 (1.5)|
Contributors: M. Annunziata; A. Bosomworth; S. Broyer; J. Callow; F. Ducrozet, J. Krämer, K. Utermöhl.
*Harmonized Index of Consumer Prices, a weighted average of price indices of eurozone countries.
Support for new (T)LTROs
Most members support the introduction of a new (T)LTRO. The main argument is that this could help to avoid an unwarranted tightening of financial conditions. Some members also mentioned that the recent lending statistics were disappointing and that the credit impulse for the Eurozone has turned negative. Concerning the design of such cheap bank loans, most members would favor to drop the T and to introduce a new LTRO. They see such a new LTRO as a means to smooth the refinancing of the outstanding TLTRO. Whereas the first tranche of the most recent TLTROs expires in June 2020, this will already affect some banks‘ Net Stable Funding Ratio (a regulatory ratio concerning bank liquidity) from mid-2019. However, some other members are in favor of a new TLTRO which would have a stronger impact on the economy. Regarding the designing of a new (T)LTRO, most members argued for a shorter maturity of for example up to 18 or 24 months. Several members would also favor to offer them at flexible rather than fixed rates.
Change of Forward Guidance
The members also see the need to change the ECB's Forward Guidance. Some would do it already in March. They argue that this would stress that the Council is ready to act in the context of decelerating growth and subdued inflation. Others would prefer to wait until April or June because of the high uncertainty at the moment. There were also different opinions about how to change the calendar part of the Forward Guidance. Some members would push out the time horizon for the first rate hike to the end of 2019 or mid-2020. Others would prefer to drop the time-contingent element altogether. They argue that this would give the ECB more flexibility. Others by contrast argued that this could backfire because the risk that the market misinterprets related remarks from ECB members might be higher.
More pessimism about rate outlook
Most members still expect that the ECB will be able to hike rates before the next downturn although they do not expect that interest rates will return to pre-crisis levels. Some members are more pessimistic. One member expressed the view that the window of opportunity for the ECB to raise rates has likely closed now that the Fed has signaled a pause. He mentioned that when the Fed paused in the past, the ECB was very unlikely to hike them.
|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|
March 3rd, 2019
Written by Jan Mallien