Konjunktur ECB Shadow Council urges ECB to continue cutting rates aggressively in January

Minutes of the meeting of the ECB Shadow Council on January 12, 2009 The ECB Shadow Council was unanimous in recommending that the ECB cut interest rates further significantly at its next policy meeting on January 15. Regarding the size of the recommended cut, a slim majority of eight members recommended an unusually large cut of one percentage point to 1.5 percent Six members preferred a rate cut of half a percentage point, one was in favour of a cut of 0.75 percentage points.

Behind the unanimous recommendation of a significant rate cut was a further severe deterioration of growth expectations and a strong decline in inflation expectations. The members who regularly provide forecasts for the Shadow Council lowered their growth forecast for 2009 on average from minus 0.7% in December to minus 1.8% in January. Thus, within only one month, the average growth forecast moved far below the low point of the range that the ECB staff has projected in December from zero to minus 1%. The average inflation forecast was pared from 1.6% to 1.0%, while the ECB staff had forecast a rate of 1.4% in December (midpoint of range).

20083.3 (3.4)0.9 (1.0)
20091.0 (1.6)-1,8 (-0.7)
20101.8 (1.7)1.0 (1.0)

Contributors:. M. Annunziata; E. Bartsch; J. Cailloux; J. Callow; S. King; T. Mayer; E. Nielsen

Contributors:. M. Annunziata, E. Bartsch; J. Cailloux; J. Callow; M. Diron; S. King; T. Mayer; E. Nielsen Assumptions: Forecaster assumed on average that the ECB would cut its key rate to 1.64 percent within the next three months and to 1.21 percent within six months.

Members were unanimous in judging that rather than inflation the most pressing danger for the near future was excessive disinflation. Several members urged the ECB to make it clear that its inflation target of "below but close to 2%" is a symmetrical one, i.e. that the ECB would act decisively to prevent the inflation rate from falling significantly below 2% for an extended period. Members argued that the inflation rate was likely to fall below zero around mid-year and that this could excessively depress general inflation expectations. It was also argued that with no growth expected on average over the next two years there would be continuing deflation pressures. To counter these deflation pressures, a negative real rate would be required, i.e. an interest rate of 1.5% or less.

A few members argued against a cut of 100bp on the grounds that such a significant acceleration in the pace of easing could undermine confidence in the ECB, because it could be taken to imply that the ECB had maintained too restrictive a policy previously. However, this argument did not find much support among other members of the committee. Likewise, the argument that at rate levels of around two percent further rate cuts might not achieve much or even be counterproductive did not convince many members of the group.

The majority in favour of a very large rate cut judged that it was highly unlikely that growth and inflation developments would surprise so much to the upside that a policy rate of 1.5% would turn out to be too low. Therefore, they deemed it important to not waste any time in giving the necessary monetary stimulus to the economy.

Membership Changes:

Christian Bordes, Economics Professor at Université Paris 1, Centre d'Economie de la Sorbonne, filled the seat vacated by Marie Diron of Oxford Economics, who is taking a few months of maternity leave.

Individual Votes

Members' individual votes for September 4 (and bias*):
Jose AlzolaThe Observatory Groupcut 0.5    (down)
Marco Annunziata


cut 1.0   (down)
Elga Bartsch

Morgan Stanley

cut 0.5    (down)
Agnes Benassy-QuereCEPIIcut 1.0     (down)
Christian BordesParis 1 Universitycut 0.5   (down)
Jacques Cailloux


cut 1.0   (down)
Julian CallowBarclays Capitalcut 1.0   (down)
Giancarlo CorsettiEurop. Univ. Institutecut 0.5    (down)
Daniel GrosCEPScut 0.75   (down)
Stephen King


cut 1.0    (down)
Thomas Mayer

Deutsche Bank

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

* Lead question regarding the bias: Upon current information, should rates be lower or higher in about three months time?

Frankfurt, January 13, 2009
Norbert Häring


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

Aggressive further easing by the ECB is still needed to ensure that the magnitude of the monetary shock is proportionate to what looks likely to be the worst year for euro area real GDP in at least the past six decades.
Julian Callow, European Chief Economist of Barclays Capital

With the Eurozone set to contract by about 2% this year and inflation poised to undershoot the target in 2009 and possibly 2010, further significant easing is needed, and it is needed now.
Marco Annunziata, Chief Economist of UniCredit Group

I am starting to wonder whether the ECB's low interest rate policy will actually work. If very low interest rates aren?t complemented with bold balance sheet clean-up and consolidation, even insolvent companies will be kept alive. In this case, excess capacity will not be taken out and the deflation-risk won?t be reduced much.
Elga Bartsch, European Chief Economist of Morgan Stanley

By cutting aggressively this week, the ECB has a window of opportunity to regain some leadership over its policy rate decisions rather than being constantly perceived as being behind the curve. The economy continued to deteriorate at an unprecedented pace during the inter meeting period; a large cut would thus not be seen as an over-reaction but rather as the appropriate response to a faltering economy.
Jacques Cailloux, European Chief Economist of Royal Bank of Scotland

The ECB is behind the curve in its rates policies and the sooner this can be corrected, the better. Given the central economic outlook, interest rates now should be no more than 1.0%-1.5%. Also, given the outlook for inflation during 2009, including several months of negative headline inflation, it is critically important to state explicitly that inflation below the target of " below but close to 2%" will be fought as aggressively as inflation above that target.
Erik Nielsen, European Chief Economist of Goldman Sachs

I suggest that the following rule, intended to ensure the effectiveness of monetary policy during this time of crisis, is to be adopted and announced: the ECB key rate will be decreased until growth expectations (as assessed by business sentiment and consumer confidence indices) are stabilised, while monitoring the concurrent evolution in inflation.
Christian Bordes, Université Paris 1 - Centre d'économie de la Sorbonne

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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