Konjunktur Minutes of the ECB Shadow Council meeting on August 28, 2008

The ECB Shadow Council recommended with a majority of 11 members that the ECB leave its key rate unchanged at 4.25 percent at the next policy meeting on September 4. Four members voted in favour of a rate cut of 25 basis points. Two thirds of members think that rates should probably be cut over the medium term.

Between late June and late August the growth outlook deteriorated markedly in the view of the Shadow Council. The average forecast for 2009 was cut from 1.3 percent to 0.8 percent. On the other hand, the inflation forecast for 2009 crept up further to 2.5 percent. This indicates a need for the ECB to strongly revise downward the midpoint of their staff projections (to be released September 4), and potentially to revise upwards the inflation forecast. In June the ECB staff forecast growth of 1.5 percent and inflation of 2.4 percent in 2009

20083.6 (3.6)1.3 (1.6)
20092.5 (2.4)0.8 (1.3)

Contributors:. J. Cailloux; J. Callow; M. Diron; M. Hume; S. King; T. Mayer; V. Riches-Flores; J.-M. Six
Assumptions: All but one forecaster assumed an unchanged ECB rate of 4.25 percent for the next six months. One assumed that the rate would go up to 4.5 percent within six months.

Many of those who thought that the ECB made a mistake when they hiked rates in July refrained from suggesting an immediate reversal on the grounds that this would tarnish the reputation of the central bank. Several members also raised the argument that a policy move in a new direction should only be considered if it was reasonably clear that more moves in the same direction would be required.

Those who argued for an immediate cut either argued that a recession was looming and significant easing was indeed required, or they considered that the long lags in policy put a premium on timely rate adjustments.

Four members argued that inflation pressure was too strong to permit giving priority to supporting growth. With inflation rates of close to four percent (preliminary 3.8 percent in August), these members considered it a major risk to the credibility of the ECB to give such an impression. According to this group, the trade off between inflation and growth had worsened significantly, such that the central bank had less scope to support growth without endangering price stability.

While this diagnosis was supported by other committee members, most of these tended to see the worsened trade-off as an argument in favour of a less time-horizon for meeting the ambitious inflation target.

Membership Changes

Michael Hume, European Chief Economist of Lehman Brothers joined the ECB Shadow Council to replace outgoing member Willem Buiter.


Members' individual votes for September 4 (and bias*):
Jose AlzolaConsultantno change (down)
Agnes Benassy-QuereCEPIIcut 0.25     (down)
Jacques Cailloux


no change (down)
Julian CallowBarclays Capitalno change (down)
Giancarlo CorsettiEurop. Univ. Instituteno change (down)
Marie DironOxford Economicsno change
Daniel GrosCEPSno change
Michael Hume

Lehman Brothers

cut 0.25     (down)
Stephen King


no change
Thomas Mayer

Deutsche Bank

cut 0.25     (down)
Gernot NerbIfo-Instituteno change (down)
Veronique Riches-Flores

Societe Generale

cut 0.25     (down)
Jean-Michel SixStandard & Poor'sno change (down)
Angel UbideTudorno change
Charles WyploszGrad. Institute. Genevano change

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

Frankfurt, August 29
Norbert Häring

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