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ECB Shadow Council: Refinancing rates near zero needed AFP

ECB Shadow Council: Refinancing rates near zero needed

At the meeting of the Shadow ECB Council on 27 June, 2013, a large majority of 12 members recommended a cut of the ECB’s main refinancing rate by a quarter percentage point to 0.25 per cent, after the ECB had last lowered it to 0.5 per cent in May. Two members recommended an unchanged rate, one a rate hike by 0.25 percentage points.

Members on average expect a decline of GDP of 0.6 per cent, unchanged from last month and in line with the latest ECB projections.  For 2014 they expect on average a slightly upwardly revised growth rate of 0.8 per cent, which is below ECB projections. Inflations forecasts remained unchanged at 1.5 per cent, this year and next, which is slightly higher than ECB projections.


Shadow Council macroeconomic forecasts (Forecast means in %, previous forecasts in brackets)

20131.5  (1.5)-0.6  (-0.6)
20141.5  (1.5)0.8 (0,7)

Contributors: M. Annunziata, M. Balmaseda; E. Bartsch; S. Broyer; J. Cailloux; J. Callow; E. Chaney, M. Diron, J. Krämer, E. Nielsen, J.-M. Six


Rates near zero needed

In light of the record level of unemployment in many countries and in the euro area as a whole, the decline of inflation, which is projected to continue, a credit crunch and an expected second year of shrinking euro area GDP, a very large majority (12 out of 15) favoured a cut of the Main Refinancing Rate, which the ECB last lowered to 0.5 per cent in May 2013.

Two members said rates should be left unchanged, another member argued in favour of a rate hike by 0.25 percentage points on the grounds that a prolonged period of abnormally low rates was distorting economic incentives.


Automatic stabilizers should be allowed to work, but no fiscal stimulus applied

There was consensus on the Shadow council that budget consolidation should not be pursued independently of economic conditions. Almost all members argued in favour of letting automatic stabilizers work, i.e. not to increase consolidation efforts, if there is a shortfall of government income and slippage in expenditure due to unfavourable business conditions. Many members argued in favour of relaxing pressure on individual governments to reduce their deficits, albeit under the conditions that these countries enact reforms which are expected to increase long-term growth. Overall though, a majority supported the high priority that is given to budget consolidation measures in the European strategy to deal with the financial crisis. Members  argued that some countries did not have a choice on whether to pursue austerity or not and others, which had a choice, did not really tighten policy that much.


There was no consensus on the question, whether Germany, as the country with the strongest economic conditions, should do more to increase domestic demand. Only a minority advocated active efforts to increase consumer demand or public investment. Other members argued that Germany did not have much fiscal leeway and that a more expansionary fiscal policy in Germany would not provide much boost to the rest of Europe. Others argued that Germany’s very large current-account-surplus should be a case for the excessive imbalance procedure and that Germany could address this easily by either letting wages rise more or by a significant increase in public investment.


Two members said that monetary issues, in particular the insufficient money supply were more important in holding back growth than fiscal austerity. They argued in favour of governments relying more on bank credit for their financing needs, as this would help expand money circulation. Others agreed with the diagnosis but said that completion of the banking union was the most important measure to deal with weaknesses in the financial system.


Members’ individual votes:

MemberAffiliationRate recommendation 
José AlzolaThe Observatory Groupunchanged 
Marco AnnunziataGeneral Electric  
Manuel BalmasedaCEMEXcut 0.25% 
Elga BartschMorgan Stanleycut 0.25% 
Andrew BosomworthPimcocut 0.25% 
Sylvain BroyerNatixiscut 0.25% 
Jacques CaillouxNomuracut 0.25% 
Julian CallowBarclays Capitalcut 0.25% 
Eric ChaneyAxa  
Janet HenryHSBCcut 0.25% 
Merijn KnibbeWageningen Universitycut 0.25% 
Jörg KrämerCommerzbankhike 0,25% 
Erik NielsenUnicreditcut 0.25% 
Jean-Michel SixStandard & Poor'scut 0.25% 
Richard WernerUniversity Southamptonunchanged 


Frankfurt, 28 June, 2013

Norbert Häring

Non-voting Chair of the Shadow ECB Council


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