Frankfurt am MainIncluding those who advocated additional unconventional measures there was a slight majority in favour of more action by the ECB to support the sluggish economic recovery, even though no individual measure was proposed by a majority. A new long term refinancing programme for commercial banks with conditions attached received considerable support.
Members expect only a sluggish recovery
All members who provide forecasts expect a subpar recovery and sub-target inflation for the next two years. On average they forecast GDP-growth of 0.9 per cent this year and 1.2 per cent in 2015. This is 0.2 and 0.3 percentage points below the latest ECB projections from December. They forecast inflation rates of 1.1 per cent this year and 1.3 per cent next year, which would mean inflation significantly below the ECB’s inflation target of “close to but below 2 per cent” for three years in a row. The Shadow Council’s average inflation forecast for this year is 0.3 percentage points below the latest ECB projection.
Shadow Council macroeconomic forecasts
(Forecast means in %, previous forecasts in brackets)
|2013||1.4 (1,5)||-0.4 (-0,4)|
|2014||1.1 (1,4)||0.9 (0,9)|
|Contributors: M. Annunziata, M. Balmaseda; E. Bartsch; S. Broyer; J. Cailloux; J. Callow; E. Chaney, M. Diron, J. Krämer, E. Nielsen, J.-M. Six|
Fragmentation of financial conditions remains key concern
Most members are quite concerned about what they consider an on-going high level of fragmentation of financial conditions in the various countries of the euro area. In particular they note that companies in peripheral countries have to pay much higher rates for loans or might not be able to obtain loans at all, than companies in core-countries. Thus, they judge that interest rate cuts by the ECB have little effect on financial conditions in those countries, in which additional support to the economy would be most needed. One member challenged the majority opinion, stressing that fragmentation had receded recently.
Further rate cut considered ineffective or premature by a majority
Still, the fragmentation of financial conditions was mentioned by several members as the reason why they did not support a further interest rate cut of the ECB. Others argued that while they were sympathetic to further monetary easing, but felt that the time was not yet opportune, given that the activity data flow was turning a little more positive. Only three members advocated a further cut of the main refinancing rate to zero. One member advocated a rate rise, arguing that the current near-zero rate promoted unwise investments and might unduly inflate asset prices.
Members who advocated a rate cut expected this to depress the euro exchange rate, something they considered helpful in supporting the recovery. Other members cited the experience with the last rate cut to express doubt that a rate-cut to zero would have much effect on the exchange rate.
Targeted Long Term Refinancing Operation receives support
While only a minority advocated a further interest rate cut, a slight majority of members overall considered the economic situation to be critical enough to warrant measures by the central bank to stimulate the recovery. Most other members advocated a wait-and-see-stance. The measure that commanded the largest support was offering a long term credit facility to banks which fulfil conditions regarding their lending activity, potentially also accompanied by less stringent collateral requirements.
Other measures proposed were:
(I) a program to alleviate banks’ balance sheet problems and the problem of over-indebtedness, including purchases of non-performing loans and stressed assets from banks and a loan restructuring program, offering conversion of rates, extension of loan duration and reduction in principal to households’ in default.
(II) A clearer commitment to keeping rates close to zero for a long time, even if inflation should overshoot the target for a while, to reduce long term rates.
(III) Buying bonds from peripheral countries to reduce sovereign lending rates and lending rates for companies in these countries.
(IV) Credit guidance by the central banks, directing commercial banks to provide more credit to productive uses and less to speculative uses.
Members’ individual votes:
|José Alzola||The Observatory Group||n.a.|
|Marco Annunziata||General Electric||unchanged|
|Elga Bartsch||Morgan Stanley||cut 0.25%|
|Julian Callow||Barclays Capital||unchanged|
|Janet Henry||HSBC||cut 0.25%|
|Merijn Knibbe||Wageningen University||cut 0.25%|
|Jörg Krämer||Commerzbank||hike 0,25%|
|Jean-Michel Six||Standard & Poor's||unchanged|
|Richard Werner||University Southampton||unchanged|
Frankfurt, 7. January, 2014
Norbert Häring, Non-voting Chairman of the Shadow ECB Council