Shadow ECB Council Council Opposed to an Immediate Rate Hike

At the meeting of the Shadow ECB Council on 31 March 2011, a large majority of 11 members recommended leaving key interest rates on hold. Three members voted in favor of recommending a rate hike of 25 basis points to 1.25 per cent. One member did not take part in the vote. A majority of members is in favor of creating a special liquidity facility for weak banks.

Members forecast still higher inflation

Members’ average inflation forecast for this year rose further to 2.4% from 2.1% a month earlier. For next year, inflation is expected to be below the ECB’s benchmark again of “below but close to two percent”. Growth expectations remained unchanged at an average of 1.7% this year and next.


Shadow Council macroeconomic forecasts

(Forecast means in %, previous forecasts in brackets)

20112.4 (2.1)1.7  (1.7)
20121.8 (1.9 )1.7 (1.7)


Contributors: 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 forecaster assumed that the ECB would raise its key policy rate to 1.25 % within three months and most assumed that it would rise further to 1.5% within the next six months.


Pro-hike: Distortion of financial markets and rising inflating pressure

Three members of the Shadow Council voted for the recommendation of a rate hike by 0.25 percentage points. They argued that the European economy was not in a crisis any more, 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 and was distorting financing decisions in general. They also argued that the global inflation climate has shifted to the worse and that a lasting increase of inflation pressure had to be countered early, even before it showed up in higher wages domestically.  

Against hike: Financial sector instability, low wage growth and uncertain outlook for the economy

Eleven members recommend an unchanged rate at the next ECB policy meeting on April 7. While eight of these members agreed that a rate hike might soon be appropriate, members in the majority camp argued that there was no pressing need to do this in the current highly uncertain environment. They mentioned and the still fragile state of the banking system in and the unresolved sovereign debt crisis as well as the risks to the economy stemming from the upheaval in North Africa and the Middle East and from the nuclear disaster in Japan.  Members in this majority camp also emphasized the slow growth of wage costs and the prevailing expectation that inflation would fall below two per cent again next year, as the effect of the recent spike in oil and raw material prices on annual inflation unwind.


Majority in favor of a special facility for ailing banks

While no formal vote was taken, a majority of members encouraged the ECB to provide a special funding facility for banks with liquidity problems and insufficient access to money and credit markets. According to these members, the condition for participating should be an agreed upon restructuring plan for these banks, to make sure that the special facility could be a temporary measure. Arguments in favor of this proposal were that it would give the ECB more clout in demanding restructuring of ailing banks and that it would allow the ECB to normalize liquidity provision for the rest of the banking system.

A minority argued that banks addicted to ECB financing are plainly insolvent and that it is the job of governments, not of the ECB, to restructure insolvent banks.


Members’ individual votes:

MemberAffiliationRate recommendationBias
José AlzolaThe Observatory Groupunchanged 
Marco AnnunziataGeneral Electric unchangedup
Manuel BalmasedaCEMEXunchangedup
Elga BartschMorgan Stanley unchangedup
Andrew BosomworthPimcohike 0.25 
Jacques CaillouxRBS unchanged 
Julian CallowBarclays Capital unchangedup
Marie DironOxford Economics unchanged 
Janet HenryHSBCunchangedup
Gustav HornIMK, Düsseldorfunchanged 
Jörg KrämerCommerzbankhike 0.25 
Thomas MayerDeutsche Bankhike 0.25 
Erik NielsenGoldman Sachs unchangedup
Jean-Michel SixStandard & Poor's unchangedup
Angel UbideTudorn.a. 


Frankfurt, 1 April 2011

Norbert Häring

Non-voting Chair of the Shadow ECB Council


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