In preparation of the meeting of the Shadow ECB Council of 1 June 2011, members exchange arguments regarding the need for and the timing of further increases of interest rates by the European Central bank.
Marie Diron: “Once the energy and VAT effects disappear, inflation will drop below 2%”
I continue to think that it is premature to raise interest rates at this stage. While I was surprised by the strength of economic activity in the core Eurozone in Q1, I continue to think that, once the energy and VAT effects disappear next year, inflation will come down below 2%. Moreover, there are significant downside risks to growth outlook. Ongoing uncertainty about the likelihood and nature of a restructuring of Greek government debt is a major factor. Our analysis suggests that in the case of a disorderly default, the Eurozone would be pulled back into recession. Any concerns about inflationary pressures would then disappear immediately and be replaced by more serious concerns about deflation.
Marie Diron is Senior Economist at Oxford Economics
Thomas Mayer: “To bring inflation back to target, higher rates are necessary”
The outlook for growth remains favourable and inflation will probably remain above target for the rest of the year. To bring it towards the target in 2012 a gradual normalisation of rates is necessary. The pace should be measured to avoid unfavourable exchange rate consequences. With the last hike dating from April another move in July would seem appropriate. In keeping with established practice this move should be signalled in June.
Thomas Mayer is Chief Economist of Deutsche Bank
Andrew Bosomworth: “A Further Normalisation of Interest Rates is Warranted”
There is a saying to make hay while the sun shines. It means to take an opportunity to do something when the time and conditions are near perfect or available. Applying this concept to monetary policy in the euro area suggests a further, gradual normalization of interest rates is warranted. Cyclical growth momentum is strong and the outlook for a continued expansion of economic output positive, core inflation is turning upward while headline inflation and measures of inflation expectations remain elevated. Given the very accommodative stance of monetary policy at present, these conditions alone justify a 25 basis point increase in June, or at least sending a signal for an increase in July. Risk management issues, particularly the impact of fiscal tightening in Greece, Ireland, Portugal and Spain as well as the risk of financial market contagion, do justify a cautious approach. These concerns can be addressed, however, by providing ongoing unlimited liquidity through full allotment tenders.
Andrew Bosomworth is Head of Portfolio Management Munich, of PIMCO
Gustav Horn: “The ECB should not raise rates before core inflation and wages increases accelerate”
There still is no immediate reason for the ECB to raise rates. Prices for oil raw material and food have even calmed down a bit so that we could expect slightly declining headline inflation rates during the next months. The decisive point is that core inflation is constantly below the inflation target and wage rise continue to be moderate. Hence there still is no inflationary danger ahead. This answers the question when the time of further interest rate hikes would have come. The ECB should raise rates as soon as the core inflation and wage increase accelerate such that the inflation target is threatened. This may be the case next year.
Gustav Horn is Scientific Director of IMK Institute
Elga Bartsch “In favour of a further rate increase but not at the June meeting”
In my view, a further gradual increase in interest rates in the euro area is likely warranted in the remainder of this year. But another rate increase is not needed already at the June meeting. In my view, our discussion should focus on the continuation of the full allotment tenders, notably the three-month tender, the reopening of the Securities Market Programme (SMP) and the potential need to introduce a long-term financing facility for banks in some peripheral countries this month. All three issues are highly topical in the light of the renewed tensions in the periphery of the euro area. In addition, we might want to discuss whether we as the Shadow Council share the ECB's fierce opposition against any from of debt restructuring in the periphery. The debate about further interest rate increases should instead be postponed to the July meeting. This would also to allow us to keep to a quarterly pace of rate rises and to see more data points on activity and inflation, both of which seem to be reaching a turning point now.
Elga Bartsch is European Chief Economist of Morgan Stanley
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