At the meeting of the Shadow ECB Council on 31 May 2012 nine of the 15 members recommended a cut of the ECB’s main refinancing rate by 0.5 percentage points to 0.5 per cent. Another three recommend a quarter point cut, while three more say a rate cut would either be useless or damaging. In case of a Greek exit from the euro area, members recommend that the ECB quickly and forcefully reassure markets of its commitment to keep banks liquid, that it resume its bond purchases and that it go to full quantitative easing. Many members judged capital controls necessary in this situation.
For the euro area on average, members continue to expect negative growth this year, low growth next year and a return to inflation below 2% next year. Growth expectations edged down a bit further, compared to last month, inflation expectations edged up.
Shadow Council macroeconomic forecasts
(Forecast means in %, previous forecasts in brackets)
|2012||2.3 (2.2)||-0,4 -(0.3)|
|2013||1.8 (1.7)||0.7 (0.8)|
Contributors: M. Annunziata, M. Balmaseda; E. Bartsch; J. Cailloux; J. Callow; E. Chaney, M. Diron, G. Horn; J. Krämer, E. Nielsen, J.-M. Six
Lower rates needed
Members agreed that the outlook for growth in the euro area in general and in the periphery in particular had deteriorated recently. In reaction, to this and to signs of intensifying tensions in financial markets, the number of members arguing for a large rate cut of half a percentage point increased from six to nine. Only three members opposed a rate cut. Two of these did so, because they regarded interest rates as irrelevant in the current situation, one because he considered interest rates to be too low already.
A majority of members argued that monetary policy currently had to consider mostly the situation in the weaker countries, not euro area averages, since the situation in these countries was threatening the very existence of the currency area.
While members held limited expectations about the efficacy of rate cuts, a large majority considered it essential that the ECB do what it can to ameliorate the situation.
ECB should “go all out” in case of a Greek exit
In the case that the outcome of the Greek parliamentary election on 17 June should cause speculation of an imminent Greek exit from the euro area, Shadow Council members would urge the ECB to adopt a proactive and aggressive communication stance to stem contagion to other peripheral countries. This would include reassuring markets and bank customers that the central bank would do everything needed to keep the banks operational.
Apart from that, a large majority considered that the ECB should be ready to deploy measures already tried in the past, like offering new long term refinancing opportunities to banks and buying government bonds of countries affected by contagion, but also be ready to venture into new territory. This might include the imposition of capital controls to prevent liquidity given to banks in troubled countries from flowing right out again. Furthermore, several members argued that a transition to full-fledged quantitative easing, i.e. buying government bonds of all countries on a large scale, would probably be needed if the crisis intensified. Others judged that such a measure was too draconian to be considered at this point.
Members reiterated their judgment that it was urgent to break the link between weak bank finances and weak government finances in individual countries by creating a European supra-national system of banking supervision and support.
However, one member argued that not only had central banks caused the crisis by letting the credit bubble happen, but also that they are in the best position to bail out troubled banks with money newly created for this purpose. This member argued that relying on taxpayer money to rescue troubled banks was inappropriate for these reasons and also that it was responsible for the pernicious feedback loop between banking problems and problems of public finances.
Members’ individual votes:
|José Alzola||The Observatory Group||cut 0.25%|
|Marco Annunziata||General Electric||cut 0.5%|
|Manuel Balmaseda||CEMEX||cut 0.5%|
|Elga Bartsch||Morgan Stanley||cut 0.25%|
|Andrew Bosomworth||Pimco||cut 0.5%|
|Jacques Cailloux||cut 0.5%|
|Julian Callow||Barclays Capital||cut 0.5%|
|Eric Chaney||Axa||cut 0.5%|
|Marie Diron||Oxford Economics||cut 0.5%|
|Janet Henry||HSBC||cut 0.5%|
|Gustav Horn||IMK, Düsseldorf||unchanged||down|
|Erik Nielsen||Unicredit||cut 0.5%|
|Jean-Michel Six||Standard & Poor's||cut 0.25%|
|Richard Werner||University Southampton||unchanged|
Frankfurt, 1 June, 2012
Non-voting Chair of the Shadow ECB Council