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Shadow ECB Council Urges ECB to Cut Rates Further

At the meeting of the Shadow ECB Council on 2 February 2012 a large majority recommended a cut of the ECB’s main refinancing rate. Six members argued in favor of a half-point cut of the refinancing rate to 0.5%, five in favour of a quarter-point cut. Four members advocated unchanged rates. The majority recommendation was for a quarter-point cut.     

Forecasters expect the recession to be short

Members continued to lower their forecasts for euro area real GDP in 2012. The average forecast declined to minus 0.4 % from plus 0.1% a month ago. This compares to the ECB staff’s December projection of 0.3% and the Shadow ECB Council’s own December forecast of 0.1%. For 2013 members predict a growth rate of 1.1% on average, slightly less than the ECB projection. Meanwhile, in the view of the Shadow Council, euro area HICP inflation is expected to decline to 1.8% in 2012 and to 1.7% in 2013. The ECB projections entails a higher a rate of 2.0% in 2012 and a lower rate of 1.5% in 2013.


Shadow Council macroeconomic forecasts

(Forecast means in %, previous forecasts in brackets)

20111.71.5 (1.6)
20121.8 (1.8)-0,4  -(0.2)
20131.7 (1.6)1.1  (1.1)

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


Large majority for a rate cut and widespread support for LTROs

Several members noted signs of a stabilization of economic conditions. Therefore, there was a certain degree of optimism that the current recession could prove to be shallow and short. However, there was also widespread concern about increasing disparities in the growth outlook, with several countries in the south facing the possibility of a severe recession.  Also the risk of a credit crunch was considered to be significant by many, in particular if the ECB were to decrease its efforts to support the economy and to inject liquidity.  

Therefore, a large majority favored a further decrease in the key interest rate. Several members explicitly remarked that the deposit rate should be cut to zero in the process, to increase the incentive for banks to make productive use of the funds that they borrow from the ECB.

The four members who preferred unchanged rates did so partly because they considered interest rate policy ineffective, partly, because they were against loosening monetary policy any further.

 The December 3-year Long Term Refinancing Operation was considered to have had very powerful results in stabilizing the banking sector, averting a full-blown credit crunch, bringing down funding costs of governments and risk-aversion in general. Most members regarded this policy tool very favourably. Some expressed concern that the decrease in funding costs of governments might lead to a decrease in their desire to reform and that the alleviation of the credit crunch could counteract the policy of reducing wages to regain competitiveness. The majority, however, held that pressure on governments and the economies of the southern countries in general was still very substantial, even after the recent easing.


Members’ individual votes:

MemberAffiliationRate recommendationBias
José AlzolaThe Observatory Groupcut 0.25% 
Marco AnnunziataGeneral Electriccut 0.5% 
Manuel BalmasedaCEMEXcut 0.5% 
Elga BartschMorgan Stanleycut 0.25% 
Andrew BosomworthPimcocut 0.5% 
Jacques CaillouxRBScut 0.5% 
Julian CallowBarclays Capitalcut 0.5% 
Eric ChaneyAxacut 0.25% 
Marie DironOxford Economicscut 0.5% 
Janet HenryHSBCcut 0.25% 
Gustav HornIMK, Düsseldorfunchangeddown
Jörg KrämerCommerzbankunchanged 
Erik NielsenUnicreditunchanged 
Jean-Michel SixStandard & Poor's cut 0.25% 
Richard WernerUniversity Southamptonunchanged 


Frankfurt,   2 February 2012

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