Konjunktur ECB Shadow Council recommends rate cut to 0.5%

At the regular meeting of the ECB Shadow Council held on Thursday 25 June, there was a slim majority in favour of lowering the ECB's refinancing rate by 50 basis points, thus concluding that rates are not appropriate at the current level of 1 %. Seven of the 15 members said rates should be left unchanged, two more than a month ago. One member advocated a cut by 75 basis points. When the vote was taken, a majority of eight settled on the recommendation of a cut by 50 basis points to 0.5 %.

Growth prospects and inflation forecasts made by Shadow Council members deteriorated somewhat further. The average GDP forecast for 2009 fell to 4.4 %,, while the average projection for GDP in 2010 was unchanged at 0.4%The average inflation rate projected for 2010 decreased slightly (from 1.2% to 1.2%, though this was only due to a change in the forecaster-panel.

20090.3 (0.3)-4.4 (-4.1)
20101.1 (1.2)0.4 (0.4)

Contributors:. M. Annunziata; E. Bartsch; J. Cailloux; J. Callow; M. Diron, G. Horn, S. King; .J. Krämer; T. Mayer; E. Nielsen; J.-M. Six
Assumptions: Most forecasters assumed that the ECB would leave its key rate at 1% for the next six months.

The discussion centred on the significance for monetary policy of signs of stabilization of the economy, the banking sector and financial markets. The slightly larger camp supporting more easing focused on the weak level of inflation and growth that was to be expected, even if the business cycle were to turn , and on the very large degree of underutilized resources which, it was argued, would keep inflation in check for a long time. In particular the sharp increase in unemployment was stressed. Members of this camp argued that the central bank should do as much as it could as quickly as possible to help counteract the widening of the output gap. Several members in this group argued that the risk of deflation was still present.

Meanwhile, those in favour of no change in rates employed two main arguments. One argument, advocated by a larger group, was that signs of stabilization had occurred before most of the fiscal and monetary stimulus decided upon had become effective, and therefore that policy makers might actually overdo the stimulus were they to add to it before the measures already implemented had begun to work. Meanwhile, another group felt that cutting the refinancing rate further would have no effect, because, they argued, banks were currently unable or unwilling to pass this stimulus on to the economy in general.

The ECB?s recent 12 month refinancing operation at an interest rate of 1.00 %, which has been used extensively by banks, was welcomed by all on the Shadow Council. Those in favour of cutting the refinancing rate further said, however, that they preferred the transparency of outright policy easing to the "easing by stealth", which they saw in such measures. They also argued that the measure would be even more powerful at a refinancing rate of 0.5 %. Those opposing a further rate cut at the current time argued instead that the issue for banks was currently not so much the price of liquidity but quantity.

Membership Change

Gustav Horn, scientific director of IMK Monetary Policy Institute in Duesseldorf joined the Shadow Council. He replaces Giancarlo Corsetti.

Individual Votes

Members' individual votes for May 7:
Jose AlzolaThe Observatory Groupno change (bias down)
Marco Annunziata


cut 0.5        
Elga Bartsch

Morgan Stanley

no change
Agnes Benassy-QuereCEPIIno change
Jacques Cailloux


cut 0.5
Julian CallowBarclays Capitalcut 0.5
Marie DironOxford Economicsno change (bias down)
Gustav HornIMK Macroeconomic Policy Institutecut 0.75
Stephen King


cut 0.5
Jörg Krämer


no change
Thomas Mayer

Deutsche Bank

no change
Erik NielsenGoldman Sachscut 0.5
Jean-Michel SixStandard & Poor'sno change
Angel UbideTudorcut 0.5
Charles WyploszGrad. Institute. Genevacut 0.5

Frankfurt, 25 june, 2009
Norbert Häring
Non-voting Chairman

Appendix 1

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

."Euro area youth unemployment has surged from 14.4% in March last year to 18.5% in April. It's likely to surge well above 20%. This urgently requires that policy be as loose as possible, and there is no good reason why the ECB cannot have its main policy rate at 0.5%""
Julian Callow, Chief European Economist of Barclays Capital

"Both monetary and fiscal policy has turned sharply expansionary. More stability in the financial sector has helped to transmit these impulses to the real economy and we have seen some green shoots emerging. Hence, we now should give policies more time to affect the economy before we decide on another impulse."
Thomas Mayer, Chief European Economist of Deutsche Bank

"The economy seems to be stabilising at a very low level. But with so much monetary and fiscal stimulus in the pipeline it makes sense to take advantage of this stabilisation to gauge the impact that the stimulus will have on growth and inflation."
Marie Diron, Senior Economist at Oxford Economics

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 economists 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 face-to-face meeting). 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 constitute 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 opinions about what the ECB should do, rather than what they forecast it to do (hence the "normative" views as expressed by Shadow Council members as to what they consider the ECB ought to do, can differ from what 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, although 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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