Two favoured keeping the rate unchanged. One member argued a hike by 25 BP would be appropriate. Most members still see a need for the ECB to go beyond cutting rates and embrace more aggressive and unconventional measures to kick-start bank lending and to get the economy out of recession.
GDP growth forecasts cut again
Members reduced their forecasts again for growth and inflation this year and next. After a decline of 0.5 per cent in 2012 and 0.6 per cent in 2013 members on average expect 0.7 per cent GDP growth in 2014. Inflation forecasts were also cut again. It now expected to fall to 1.5 per cent this year and to stay at this level in 2014.
Shadow Council macroeconomic forecasts
(Forecast means in %, previous forecasts in brackets)
|2013||1.5 (1.7)||-0.6 (-0.4)|
|2014||1.5 (1.6)||0.7 (0.8)|
Contributors: E. Bartsch; S. Broyer; J. Cailloux; J. Callow; J. Kraemer, J. Henry
Rates near zero and more aggressive measures needed
In light of the record level of unemployment in many countries and in the euro area as a whole, the decline of inflation, which is projected to continue, and an expected second year of shrinking euro area GDP, a very large majority (12 out of 15) favoured a cut of the Main Refinancing Rate by 0.25 per cent, which the ECB last lowered to 0.5 per cent early May.
Several members mentioned that cutting rates would help to fend off the relative strength of the Euro that was seen as hurting the economy especially in the peripheral countries.
Two members said rates should be left unchanged on the grounds that further cuts could be counterproductive.
One member voted for bringing the main refinancing rate back to 0.75 per cent essentially to signal the fiscal authorities that they need to address the economic situation of the euro zone instead of relying on monetary policy. He also argued that a prolonged period of abnormally low rates was distorting economic incentives.
Some members argued that the deposit rate, currently at zero, should be lowered with the main refinancing rate into negative territory to provide further accommodation. Working the interest rate channel would involve fewer risks than unconventional measure like asset purchases, some said. Some members agreed with this view but preferred to delay the use of this tool to study the economic development and the efficiency of this tool.
While some members were unsure if such move would have a net benefit at all, a few members argued that this could be even counterproductive.
Many members said the ECB should follow the example of the Federal Reserve Bank and give an explicit forward guidance to signal the markets that the interest rates would stay low for an extended period of time. This could be an incentive for banks to move money currently invested into sovereign debt into their lending business, they argued.
The discussion showed that most members still favour unconventional measures. A rate cut alone would not have sufficient impact on bank credit and the economy, they said.
Several members agreed that providing further monetary stimulus could aggravate moral hazard risks and could lead to asset bubbles especially in the core countries. They argued that this was tolerable given the political and social consequences that inaction could have. One member even pointed out that the fiscal authorities could use taxation to avoid such bubbles from developing.
Members’ individual votes:
|José Alzola||The Observatory Group||unchanged|
|Marco Annunziata||General Electric||cut 0.25%|
|Manuel Balmaseda||CEMEX||cut 0.25%|
|Elga Bartsch||Morgan Stanley||cut 0.25%|
|Andrew Bosomworth||Pimco||cut 0.25%|
|Sylvain Broyer||Natixis||cut 0.25%|
|Jacques Cailloux||Nomura||cut 0.25%|
|Julian Callow||Barclays Capital||cut 0,25%|
|Eric Chaney||Axa||cut 0.25%|
|Janet Henry||HSBC||cut 0.25%|
|Merijn Knibbe||Wageningen University||cut 0.25%|
|Jörg Krämer||Commerzbank||hike 0,25|
|Erik Nielsen||Unicredit||cut 0.25%|
|Jean-Michel Six||Standard & Poor's||cut 0,25%|
|Richard Werner||University Southampton||unchanged|
New York, 29 May, 2013
Non-voting Chair of the Shadow ECB Council