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Following its regular monthly discussion, the ECB Shadow Council is recommending that the ECB cut its key interest rates by 0.5 percentage points to 1.5 percent at its next policy meeting on February 5. Of the 15 members two were in favour of unchanged rates, while 13 were in favour of a rate cut. Of those 13, five had a first preference for a cut by 100 basis points to 1%, two for a cut by 75 basis points and six for a cut by 50 basis points. Both members in favour of unchanged rates deemed it likely that a further rate cut might prove to be needed at some later meeting.

While growth prospects and inflation forecasts declined further, the decline was much less severe than before. The members who regularly provide forecasts for the Shadow Council lowered their growth forecasts for 2009 on average from minus 1.8% to minus 1.9% and the inflation forecasts from 1.0% to 0.9%. Thus, both the average growth and the average inflation forecasts are clearly below the lower limits of the range given by the ECB staff in December, which was minus 1% for growth and 1.1% for inflation.

20083.3 (3.3)0.8 (0.9)
20090.9 (1.0)-1,9 (-1.8)
20101.7 (1.8)1.0 (1.0)

Contributors:. M. Annunziata; E. Bartsch; J. Cailloux; J. Callow; S. King; T. Mayer; E. Nielsen; J.-M. Six
Assumptions: Forecasters assumed on average that the ECB would cut its key rate to 1.42 percent within the next three months and to 1.18 percent within six months.

While forecasts seemed to stabilize at very low values, uncertainty remains high. Several members said that they expected the brunt of the crisis to become more visible in the statistics over the coming few months. Most members felt that the ECB has been easing rates too late and too little, and thus still had some catching up to do, rather than to make a pause in cutting rates. The large majority in favour of a rate cut on February 5 judged that it was highly unlikely that growth and inflation developments would surprise so much to the upside that a policy rate of 1.5% or even lower would turn out to be too low. Therefore, they deemed it important to deliver more monetary stimulus expeditiously..

The announcement made by the ECB president, that the ECB Governing Council wished to avoid getting caught in a liquidity trap by not cutting rates to "very,very low levels" was met with scepticism at the Shadow Council. The prevailing view was that it was not very low rates per se which constituted a liquidity trap, but rather the possibility that even at zero rates the monetary stimulus would be insufficient. Therefore, members argued that the desire to avoid such a situation should serve as an argument to cut rates aggressively, providing the necessary stimulus as early as possible.

Members unanimously reiterated their plea that the ECB should urgently develop and communicate a contingency plan which would detail how it might continue to provide additional monetary stimulus via "unconventional" methods under conditions of reaching a zero overnight interest rate (quantitative easing). Additionally, most members urged the ECB to do more to promote a coordinated monetary and fiscal policy across the euro area. They argued that fiscal policy needed the support of an expansionary monetary policy in order to be effective in supporting growth and also that if the ECB wanted to expand the monetary base by buying government bonds, it needed to get into talks with finance ministers regarding the details.

Several members voiced doubts about the strength of the impact of further rate cuts on the real economy. Those who favored unchanged rates argued that cutting rates would not address the perceived main problem, i.e. the dysfunctional banking system. According to this view it would be more effective to supply credit to the private non-banking sector directly, and this could be done at any level of rates. Meanwhile, the members advocating a reduction of 75bp or 100bp argued that the collapse in the level of activity and the implied sharp widening of the output gap meant that an extraordinary monetary response was still necessary.

Individual Votes

Members' individual votes for September 4 (and bias*):
Jose AlzolaThe Observatory Groupno change (down)
Marco Annunziata


cut 1.0         (down)
Elga Bartsch

Morgan Stanley

cut 0.5         ;(down)
Agnes Benassy-QuereCEPIIcut 0.75        (down)
Christian BordesParis 1 Universitycut 0.25        (down)
Jacques Cailloux


cut 0.5         (down)
Julian CallowBarclays Capitalcut 1.0         (down)
Giancarlo CorsettiEurop. Univ. Institutecut 0.5          (down)
Daniel GrosCEPScut 0.5         (down)
Stephen King


cut 0.75        (down)
Thomas Mayer

Deutsche Bank

cut 0.5          (down)
Erik NielsenGoldman Sachscut 1.0           (down)
Jean-Michel SixStandard & Poor'sno change  (down)
Angel UbideTudorcut 1.0         (down)
Charles WyploszGrad. Institute. Genevacut 1.0         (down)

* Lead question regarding the bias: Upon current information, should rates be lower or higher in about three months time?

Frankfurt, January 13, 2009
Norbert Häring
Non-voting Chairman

Appendix 1

Quotes from individual members of the Shadow Council
(in no particular order)

"I had thought conditions might have improved a bit by now but that is not really the case: business and consumer sentiment have hit record new lows. Moreover, it is increasingly clear that the output cut-backs in November were not a one-off; and that the collapse in demand is a truly global phenomenon. The collapse in output requires a collapse in interest rates."
Julian Callow, European Chief Economist of Barclays Capital

"I fully share the majority?s call to get ready for untraditional easing measures, but I disagree with the majority in saving ammunition in terms of rate cuts. Hence, I voted for 100 bp rate cut. I quote ECB Governing Council member Orphanides from January 28:: ?a central bank with a policy rate that is positive but rather low, might be incorrectly advised to save its ammunition so that it may still be in a position to ease policy later on?. Well said!"
Erik Nielsen, European Chief Economist of Goldman Sachs

"While I would have favored a larger cut, I believe the ECB's priority now should be to develop and clearly outline a quantitative easing strategy to offset the oncoming credit crunch and counter the strong downside risks to the inflation target."
Marco Annunziata, Chief Economist of UniCredit Group

"The question of the size and speed of interest cuts by the ECB is rapidly becoming an issue of second order of importance especially with the overnight rate at already close to 1%. The ECB urgently needs to lay out what a coordinated euro area response should look like. The euro area is neither the US nor the UK and thus needs to have a response tailored to its institutional set up. It is time for executive branches across the euro area to work much more closely with the Eurosystem to offer a consistent response across the region."
Jacques Cailloux, European Chief Economist of Royal Bank of Scotland

"In my view, the ECB?s intention to pause because there is only a three week lapse since the January meeting does not make much sense as most of the key data releases in the euro area are coming out in this three weeks. Hence, I would again favour a 50 bp cut at this week's meeting."
Elga Bartsch, European Chief Economist of Morgan Stanley, London

Appendix 2

Background information

The ECB Shadow Council was founded in 2002 upon an initiative of Handelsblatt, the German business and financial daily. It is an unofficial panel, independent of the ECB/Eurosystem, and comprising fifteen prominent European economist?s drawn from academia, financial institutions, consultancies and research institutes.

The Shadow Council usually convenes by telephone conference on a monthly basis (though in November it holds a physical meeting). Its discussions take place a week before the monthly official ECB Governing Council "policy" meetings, and are intended to formulate an opinion as to what monetary policy decision its members believe that the ECB's Governing Council ought to undertake, both at its forthcoming meeting and also on a three month horizon. Shadow Council members are encouraged to submit their own economic projections for euro area activity and inflation on a monthly basis, which constitutes the panel's forecast consensus as published each month.

The Shadow Council's discussions and recommendations differ from surveys of economists concerning the outlook for ECB interest rates because the Shadow Council recommendation expresses the majority view of its' members opinion about what the ECB should do, rather than what they forecast it to do (and hence the "normative" views as expressed by Shadow Council members on what they consider the ECB ought to do can and often do differ from what they might say they expect the ECB to do). This "normative perspective can, however, give an early indication of shifts in the balance of opinion in the expert community, as can be seen by comparing the historic recommendations of the Shadow Council against subsequent decisions undertaken by the ECB Governing Council.

Members of the Shadow Council base their recommendations on the ECB's objectives as defined under the EU Treaty, though Shadow Council members do not necessarily adopt exactly the ECB's specific interpretation of its mandate: most Shadow Council members consider that a medium term inflation objective of two percent with a symmetric tolerance band around it would be clearer, more realistic and more appropriate than the definition adopted by the Governing Council, which defines price stability as an inflation rate of "below, but close to, two percent", in the medium term.

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