Growth forecasts go down further
After strong downward revisions in the preceding months, members continued to lower their forecast for euro area real GDP in 2012. The average forecast declined one further notch to 0.6%, which compares to the ECB staff’s September projection of 1.3% and the Shadow ECB Council’s own projection of 1.6% back in July. Meanwhile, in the view of the Shadow Council, euro area HICP inflation is expected to decline to 1.7% in 2012, down from 2.6% this year.
Shadow Council macroeconomic forecasts
(Forecast means in %, previous forecasts in brackets)
|2011||2.6 (2.6)||1.6 (1.7)|
|2012||1.7 (1.8)||0.7 (1.1)|
Contributors: M. Annunziata, M. Balmaseda; E. Bartsch; J. Cailloux; J. Callow; E. Chaney, M. Diron, J. Henry, G. Horn; J. Krämer, J.-M. Six
Assumptions: Most forecaster assumed that the ECB will cut its key policy rate to 1.25% within three months and to 1% within six months.
Overall positive assessment of summit decisions
All but one member who took part in the discussion delivered an overall positive assessment of the decisions taken by the heads of state at the EU summit on 26 October. They judged that the risk of a financial meltdown in the euro area had been significantly reduced by the proposed haircut on Greek government debt papers and measures proposed to prevent a wave of bank failures.
There was widespread scepticisms, however, if the leveraging of the EFSF would succeed as expected. Members were sceptical in particular that enough private money and money from outside the Euro area could be attracted to leverage the financial firepower of the EFSF to more than a trillion euro. It was also remarked that the creation of a Special Purpose Investment Vehicle created opacity and was unfortunate, as such vehicles had had a large part in causing the financial crisis starting in 2007/2008.
Higher capital requirement for banks increases the risk of a deep recession
The risk of a relapse of the euro areas economy into recession had been considered rather high by many members already before the conclusions of the Brussels EU summit on 26 October. Several members warned that the decision to require banks to raise their capital ratio by mid-2012 was likely to trigger a credit squeeze on households and companies as banks would try to raise their capital ratio by lowering their risky assets. Therefore, they considered it imperative that the ECB counterbalance this effect by immediately lowering rates and by increasing the supply of central bank money. This view was widely shared, even though some members cautioned that the summit decisions also included additional support for banks that would help them to meet their funding requirements associated with providing loans.
Those not in favour of an immediate rate cut judged that interest rates were very low already and that the ECB’s focus should be on measures to improve the functioning of financial markets.
Inflation risks were not considered an impediment to rate cuts by most council members, as they projected that the inflation rate would start declining soon and move safely below 2% in 2012 and 2013.
ECB needs to step up support
There was a strong consensus on the Shadow Council that the ECB’s involvement in the market for government securities will continue to be needed, as the EFSF has only limited financial means. Therefore, all members agreed that the ECB should keep its Securities Market Program active, to signal that it is still ready to act as needed. Several members argued, the ECB should step up its purchases of securities in order to push more central bank money into the system.
Members’ individual votes:
|José Alzola||The Observatory Group||cut 0.25%|
|Marco Annunziata||General Electric||unchanged||down|
|Elga Bartsch||Morgan Stanley||cut 0.25%|
|Andrew Bosomworth||Pimco||cut 0.25%|
|Jacques Cailloux||RBS||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||cut 0.5%|
|Erik Nielsen||Unicredit||cut 0.25%|
|Jean-Michel Six||Standard & Poor's||cut 0.25%|
|Angel Ubide||Tudor||cut 0.5%|
Frankfurt, 28 October 2011