Konjunktur ECB Shadow Council recommends a substantial rate cut and requests that the ECB urgently develop a plan for quantitative easing

Minutes of the meeting of the ECB Shadow Council on February 26, 2009

Following its regular monthly discussion, the Shadow Council was unanimous in recommending that the ECB ought to lower its main policy rate by at least 50 basis points at its Governing Council meeting next Thursday. The Shadow Council was also unanimous in urging the ECB to make a plan regarding how it would proceed with monetary easing in the event that interest rates reached zero. Of the 15 Shadow Council members, six were in favour of a cut by 100 basis points to one percent at the next ECB policy meeting on March 5, nine were in favour of a cut by 50 basis points.

Growth prospects and inflation forecasts declined further significantly. The members who regularly provide forecasts for the Shadow Council lowered their growth forecasts for 2009 on average from minus 1.9% to minus 2.2 percent and the inflation forecasts from 0.9 percent to 0.5 percent. Even with the assumption that the ECB will lower its policy rate to 1.0 percent in the near term, members projected that real GDP next year would grow only by 0.9 percent, along with inflation at 1.4%, undershooting the desirable inflation rate of around two percent. .

20083.3 (3.3)0.7
20090.5 (0.9)-2.2 (-1.9)
20101.4 (1.7)0.9 (1.0)

Contributors:. M. Annunziata; E. Bartsch; J. Cailloux; J. Callow; S. King; T. Mayer; E. Nielsen; J.-M. Six
Assumptions: Forecasters assumed on average that the ECB would cut its key rate to 1.42 percent within the next three months and to 1.18 percent within six months.

The minority of six members who favoured a policy rate cut of 100bp judged that it was highly unlikely that growth and inflation developments would surprise so much to the upside that a policy rate of 1.0 percent would turn out to be too low, any time soon. Therefore, they deemed it important to deliver more monetary stimulus expeditiously. Members in favour of a smaller cut argued that an extraordinarily large move might damage confidence and that a series of half point cuts in monthly intervals would have the same result as one large cut.

Members unanimously reiterated their plea that the ECB urgently develop and communicate a contingency plan for loosening monetary conditions by unconventional means (quantitative easing) lest interest rates reach the zero bound and yet still more stimulus were required (the Shadow Council had first made this plea in November 2008).

Most members advocated the purchase of private sector credit paper like corporate bonds, commercial paper and covered bonds. However, some argued that there was a danger that the private sector might hoard a large share of the money obtained from the sale of their debt instruments to the central bank, and therefore that the ECB might need to buy government bonds. On the other hand, some members cautioned that the purchase of government bonds raised difficult issues about the independence of the ECB and the fairness of relative treatment of the various countries? debt instruments. Additionally, the Shadow Council unanimously considered that the ECB should clarify urgently internally and with the finance ministers the issue of obtaining indemnity for any losses incurred in the process of buying debt instruments. It was stressed by some that the Federal Reserve and the Bank of England had obtained such shielding form losses for the actions they planned or already executed, while others deemed such a precaution not a requirement.

Some members considered that the time was not yet appropriate for the ECB to embark upon un-sterilised quantitative easing, but that this measure might need to be considered at a later stage should the envisaged conventional monetary policy easing not be sufficiently effective at restoring demand expansion in the euro area. Others argued that the ECB should begin buying assets with as little delay as possible.

Individual Votes

Members' individual votes for March 5:
Jose AlzolaThe Observatory Groupcut 0.5
Marco Annunziata


cut 1.0        
Elga Bartsch

Morgan Stanley

cut 0.5
Agnes Benassy-QuereCEPIIcut 0.5
Christian BordesParis 1 Universitycut 0.5
Jacques Cailloux


cut 0.5
Julian CallowBarclays Capitalcut 1.0
Giancarlo CorsettiEurop. Univ. Institutecut 1.0
Daniel GrosCEPScut 0.5
Stephen King


cut 1.0
Thomas Mayer

Deutsche Bank

cut 0.5
Erik NielsenGoldman Sachscut 1.0
Jean-Michel SixStandard & Poor'scut 0.5
Angel UbideTudorcut 1.0
Charles WyploszGrad. Institute. Genevacut 0.5

Frankfurt, February 26, 2009
Norbert Häring
Non-voting Chairman

Appendix 1

Quotes from individual members of the Shadow Council
(in no particular order)

"With the inflation target set to be undershot throughout the policy-relevant horizon, rates should be immediately cut to 0.5-1.0%. It is also time to spell out a QE strategy focused on getting credit directly to the real economy, through unsterilized purchases of corporate bonds and commercial paper, to offset the oncoming credit crunch."
Marco Annunziata, European Chief Economist of Unicredit in London

"The time has come for the ECB to clearly define the further steps of non-traditional monetary policy measures they will take if needed. This includes clarifying, possibly in cooperation with the Eurogroup of Finance Ministers, whether and how they can engage in "credit easing" (sterilised or non-sterilised purchases of private sector debt in the open market) and "quantitative easing" (sterilised or non-sterilised purchases of government bonds)."
Thomas Mayer, European Chief Economist of Deutsche Bank, London

"On the basis of all available information there seems almost no doubt that the output gap will continue to increase through 2009 and 2010, putting further downward pressure on inflation. I can therefore see no reason for delaying rate cuts to their minimum of 0.5% (or maybe 1.0%). As this conventional instrument gets exhausted, the ECB should quickly move on to QE, defined as unsterilized purchases of assets. Such purchases should be distributed geographically and over asset classes as widely as possible"
Erik Nielsen, European Chief Economist of Goldman Sachs

"The euro area banking sector is absolutely central to the financing of the euro area economy. It's essential to get the main policy rate down quickly to 1% now, and act promptly to help euro area financing conditions to improve, to avoid the serious risk that euro area inflation significantly undershoots 2% in the medium term."
Julian Callow, European Chief Economist of Barclays Capital

Appendix 2

Background information

The ECB Shadow Council was founded in 2002 upon an initiative of Handelsblatt, the German business and financial daily. It is an unofficial panel, independent of the ECB/Eurosystem, and comprising fifteen prominent European economist?s drawn from academia, financial institutions, consultancies and research institutes.

The Shadow Council usually convenes by telephone conference on a monthly basis (though in November it holds a physical meeting). Its discussions take place a week before the monthly official ECB Governing Council "policy" meetings, and are intended to formulate an opinion as to what monetary policy decision its members believe that the ECB's Governing Council ought to undertake, both at its forthcoming meeting and also on a three month horizon. Shadow Council members are encouraged to submit their own economic projections for euro area activity and inflation on a monthly basis, which constitutes the panel's forecast consensus as published each month.

The Shadow Council's discussions and recommendations differ from surveys of economists concerning the outlook for ECB interest rates because the Shadow Council recommendation expresses the majority view of its' members opinion about what the ECB should do, rather than what they forecast it to do (and hence the "normative" views as expressed by Shadow Council members on what they consider the ECB ought to do can and often do differ from what they might say they expect the ECB to do). This "normative perspective can, however, give an early indication of shifts in the balance of opinion in the expert community, as can be seen by comparing the historic recommendations of the Shadow Council against subsequent decisions undertaken by the ECB Governing Council.

Members of the Shadow Council base their recommendations on the ECB's objectives as defined under the EU Treaty, though Shadow Council members do not necessarily adopt exactly the ECB's specific interpretation of its mandate: most Shadow Council members consider that a medium term inflation objective of two percent with a symmetric tolerance band around it would be clearer, more realistic and more appropriate than the definition adopted by the Governing Council, which defines price stability as an inflation rate of "below, but close to, two percent", in the medium term.

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