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14:48 Uhr


Shadow ECB Council Sees Fears of Bubbles Overdone

At the latest meeting of the Shadow ECB Council there was unanimity that the ECB should not change its key interest rate any time soon . A majority of members thinks that fears about new bubbles forming as a consequence of loose monetary policies are not well founded.

Forecasts made by Shadow Council members did not change significantly on average from a month earlier. The prevailing expectation is for a return to moderate growth in 2010 and 2011 and slightly higher but still low inflation into 2011. The prevailing view was that underutilized production capacities will keep exerting downward pressures on wages and prices for a long time.

Shadow Council macroeconomic forecasts

(Forecast means in %, previous forecasts in brackets)

20101.2 (1.2)1.2 (1.1)
20111.5 (1.5)1.5 (1.5)

Contributors:. M. Annunziata; E. Bartsch; J. Cailloux; J. Callow; M. Diron, G. Horn, S. King; .J. Krämer; T. Mayer; E. Nielsen; J.-M. Six
(Last month?s forecasts in brackets) Assumptions: All forecasters assumed that the ECB would leave its key rate at 1% for the next six months.

Rate Recommendation

There was unanimity that the ECB should not change interest rates at the next policy meeting on 14. January and no member expects a rate hike to become appropriate within the next three months.

Monetary Policy and Asset Prices

In policy circles there is a debate about the right timing and speed for ending the extraordinarily loose monetary policy and withdrawing some of the additional liquidity provided to stem the financial crisis. Some policymakers and economists have asserted that loose monetary policies have in the past been a key factor in inflating dangerous asset price bubbles and that new bubbles might be forming if monetary policy was kept too loose for too long.

The Shadow ECB Council, however, warned against premature monetary tightening inspired by such fears. The large majority of members were of the opinion that asset prices in Europe are currently far from bubble territory and that, besides, central banks do not have the right tools to combat the formation of such bubbles.

Regarding the first point, the extremely weak development of monetary and credit aggregates was cited as proof of the absence of speculative activity. Regarding the second point, it was argued by the majority that governments and regulators were responsible for preventing speculative excesses and had the means to do so. As evidence it was mentioned that only some countries in Europe experienced house price bubbles recently, while others did not, even though all had the same monetary policy environment. Members mentioned research, according to which house prices reacted with a much longer lag to monetary policy changes than stock prices, making it exceedingly difficult to target consumer prices, house prices and stock prices, all with the same interest rate instrument.

Many members admitted that in some markets, particularly in Asia, signs of bubbles forming could be detected. However, they argued, that this was not the responsibility of the ECB, as the affected countries could shield themselves by an appropriate exchange rate policy.

The minority view was that overly loose monetary policy created so much speculative pressure on asset prices that regulators would normally be overburdened with preventing the formation of bubbles without help from monetary policy.

Procedural Note

Due to the holiday season, the vote and discussion were conducted via e-mail this month.

Individual Votes

Members' individual votes for 3 September:
Jose AlzolaThe Observatory Groupno change
Marco Annunziata


no change
Elga Bartsch

Morgan Stanley

no change
Agnes Benassy-QuereCEPIIno change
Jacques Cailloux


no change
Julian CallowBarclays Capitalno change
Marie DironOxford Economicsno change
Gustav HornIMK Macroeconomic Policy Instituteno change
Stephen King


no change
Jörg Krämer


no change
Thomas Mayer

Deutsche Bank

no change
Erik NielsenGoldman Sachsno change
Jean-Michel SixStandard & Poor'sno change
Angel UbideTudorno change
Charles WyploszGrad. Institute. Genevano change

Frankfurt, 29 December 2009
Norbert Häring
Non-voting Chairman of the Shadow ECB Council

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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