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Shadow ECB Council Council in Favor of Switching to Variable Rate Tender but Against a Rate Hike

At the meeting of the Shadow ECB Council on 24 February 2011, a large majority recommended leaving key interest rates on hold. However, a majority was in favor of switching the 3-month refinancing operations from fixed-rate to variable-rate tender. Most members are sceptical about the virtue of greater coordination of economic policies as a means of dealing with uneven economic developments within the currency union.

Frankfurt Members forecast still higher inflation

Members’ inflation forecasts for this year rose further to 2.1% on average. For next year, inflation is expected to be below the ECB’s benchmark again of “below but close to two percent”. Growth expectations increased further to an average of 1.7% this year and next.


Shadow Council macroeconomic forecasts

(Forecast means in %, previous forecasts in brackets)



Contributors:. M. Annunziata; M. Balmaseda; E. Bartsch; J. Cailloux; J. Callow; M. Diron, J. Henry, G. Horn; J. Krämer, T. Mayer; E. Nielsen; J.-M. Six

Assumptions: All but one forecaster assumed that the ECB would leave its key policy rate unchanged at 1 % for the next six months. One assumed a rate hike to 1.25 % within the next six months.


No interest rate hike while financial sector is not stable

Two members of the Shadow Council voted for the recommendation of a rate hike by 025 percentage points. They argued that the economic situation had improved, such that a very low key interest rate of 1% was not justified any more. They further argued that excessively loose monetary policy in the big industrial countries was pushing up asset prices, including commodities, in a dangerous way. Two more members expressed a bias toward supporting such a recommendation within the next three months.

The other eleven members recommend an unchanged rate. They regard the state of the financial sector as too fragile and the economic recovery as not robust enough, to allow for an increase in interest rates any time soon. Members in this majority camp also emphasized the slow growth of wage costs and the subdued rate of core-inflation, i.e. inflation excluding prices for energy and food.


Switch Long Term Refinancing Operations to Variable Rate Tender

A majority of roughly two thirds of Shadow Council members thinks that the first step toward a more restrictive monetary policy should be the announcement at the next ECB meeting that the 3 month refinancing operations will be switched from fixed-rate and unlimited amount to fixed-amount and variable-rate tenders, while the regular weekly tenders should continue to be offered with unlimited quantity at a fixed rate. 


No need for coordinating economic policies

Members did not think that the “competitiveness pact” proposed by the governments of Germany and France was worth its while. While many agreed that the individual measures contained in this pact were worth taking for individual countries, most saw no need to harmonize pension systems or tax bases. They saw the danger that pursuing harmonization measures with little chance of success would distract attention from the important issues. There was a consensus that the important issues were a better transnational supervision of banks, including the introduction of a mechanism to wind-down insolvent banks, and improvement of the institutional framework regarding control of government finances and rules for financial support.


Members’ individual votes:

MemberAffiliationRate recommendation
José AlzolaThe Observatory Groupunchanged
Marco AnnunziataGeneral Electric unchanged
Manuel BalmasedaCEMEXunchanged
Elga BartschMorgan Stanley unchanged
Andrew BosomworthPimcohike 0.25
Jacques CaillouxRBS unchanged
Julian CallowBarclays Capital unchanged
Marie DironOxford Economics unchanged
Janet HenryHSBCunchanged
Gustav HornIMK, Düsseldorfunchanged
Jörg KrämerCommerzbankhke 0.25
Thomas MayerDeutsche Bank(+)
Erik NielsenGoldman Sachs unchanged
Jean-Michel SixStandard & Poor's unchanged
Angel UbideTudor (+)

+) indicates a bias toward higher rates


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 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.


Norbert Häring, Non-voting Chair of the Shadow ECB Council


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