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Shadow ECB  Inflation forecast moves up

At the meeting of the Shadow ECB Council on 29 March 2012 a large majority continued to recommend a cut of the ECB’s main refinancing rate. Members consider increasing divergences within the euro area a major thereat, albeit one the ECB is ill-equipped to handle with its instruments.      

Members slightly raised their 2012 growth forecast to an average of minus 0.3%, which is still more pessimistic than the ECB staff’s March projection of minus 0.1%. Similarly, the 2013 forecast of 0.9% is two notches below the corresponding ECB projection. Meanwhile, in the view of the Shadow Council, euro area HICP inflation is no longer expected to decline below 2% this year. Members raised their forecast significantly to 2.2%, which is still below the ECB’s projection of 2.4%.  


Shadow Council macroeconomic forecasts

(Forecast means in %, previous forecasts in brackets)

20122.2 (1.9)-0,3  -(0.4)
20131.8 (1.7)0.9  (0.9)


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 continues to favour a rate cut

There continued to be a more than two-third majority in favour of a decrease in the ECB’s refinancing rate. The main argument in favour was the prospect of negative growth in the euro area. Most members would expect a rate cut to  weaken the external value of the euro, which would stimulate external demand and make domestic producers more competitive vis-à-vis importers.  It was also argued by some that lower rates would contribute to strengthening the banking sector by helping banks achieve higher earnings.


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


Divergences seen as a major threat that the ECB is ill-equipped to handle

Members agree that economic conditions in the euro area will continue to diverge as peripheral countries need to continue for years cutting budget deficits, deleverage of the private sector and cut costs in order to become more competitive. There was a consensus that the ECB should err on the side of easy monetary policy – without giving up their commitment to stick to the inflation target – to support these adjustment efforts. It was mentioned that some of the unconventional measures that the ECB already employed, like the Securities Market Programme and the 3-year LTROs were addressing divergent developments in the euro area. Beyond that, there is not much the ECB can do according to the consensus view. One of the ideas put forward was to extend a credit line to the European Investment Bank to support a major lending strategy for public investment in Southern Europe.


According to the consensus, the main responsibility for reigning in divergent economic developments lies with banking supervision – via macro-prudential instruments – and fiscal policy.

 It was noted by several members that the ECB should welcome any signs of above-average inflation in core-countries as a necessary part of rebalancing and not as a sign that overall inflation is picking up and monetary policy has to be tightened.


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,   29 March 2012

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


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ECB Shadow Council Background information
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