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Shadow ECB Council

Members split over further policy action

VonChristopher Cermak, Jan Mallien

Shadow Council members were split on whether the European Central Bank should ease monetary policy further. The vote was split 8-7 in favour of lowering the deposit rate.

ECB's headquarters in Frankfurt. dpa

European Central Bank

ECB's headquarters in Frankfurt.

FrankfurtShadow Council members were split on whether the European Central Bank should ease monetary policy further at its next meeting on December 3, with divisions over whether the benefits outweigh the risks or the risks outweigh the benefits at this juncture.The vote was split 8-7 in favor of lowering the deposit rate. Some members also argued in favor of raising the level of monthly asset purchases. The average forecasts for inflation have been revised down slightly to 0.1 percent for 2015. For 2016 they remained at 1.1 percent. For 2017 the average forecast is 1.4 percent.  

Inflation forecast for 2017 below ECB projections

Compared to three months ago, the average forecast for inflation this year has been reduced to 0.1 percent, after it had already been reduced in September. This is equal to the ECB’s staff projection from September. The Shadow Council’s mean forecast of 1.1 percent for 2016 is also equal to the ECB’s September projection. For 2017, however, the forecast of 1.4 percent is below the ECB’s projection of 1.7 percent. The Shadow Council’s mean forecast for GDP growth in 2015 has been revised upward from 1.3 percent to 1.5 percent and for 2016 from 1.5 percent to 1.6 percent. For 2017, the average forecast for GDP growth is 1.6 percent. 

Shadow Council macroeconomic forecasts (ECB’s September projections in brackets)
20150.1 (0.1)1.5 (1.4)
20161.1 (1.1)1.6 (1.7)
20171.1 (1.5)1.6 (1.8)
Contributors: M. Annunziata, E. Bartsch; A. Bosomworth; S. Broyer; J. Cailloux; J. Callow;, J. Henry, J. Krämer, F. Lindner, E. Nielsen

Split On More ECB Easing

Shadow Council members were split on whether the European Central Bank should ease monetary policy further at its next meeting on December 3, with divisions over whether the benefits outweigh the risks or the risks outweigh the benefits at this juncture.

Some members called for the ECB to be more aggressive early in order to counteract the significant drop in inflation expectations seen in the market place. The best strategy, in their view, is to ease significantly and aggressively – through expanded asset purchases and cuts in the deposit rate – rather being cautious. The output gap in the euro area economy remained too large to stand by.

Among the proponents of more easing, one member argued that Mario Draghi’s October press conference created a certain expectation in the marketplace that could not be easily disappointed. Another member called for a smaller “signal” to be sent, for example by cutting the deposit rate, rather than an aggressive expansion at this time.

Other members, however, argued that the ECB’s existing measures should be given more time to work, and that the trajectory of inflation and growth in the euro-zone economy remained too uncertain at this time. There was no immediate need for action in December, though some members could be persuaded to change their calls in the first quarter of 2016. One member said the ECB can afford to wait for the release of its next staff projections before taking a decision. Another member noted that significant economic data is still due between now and December 3 that could yet sway the decision either way.

Among the opponents of further easing, one member argued the ECB should hold its additional firepower to guard against the risk of a deeper and unexpected downturn in the economy or financial sector. Additional easing should be saved so that there would still be tools available to deal with this eventuality.

One opponent of additional easing called on the central bank to adjust its inflation target to a longer-term horizon, arguing the ECB’s measures, focused on short to medium-term inflation, have had little impact on the real economy, instead simply pushing up real estate and other asset prices. A longer-term goal would account for the unusual historical situation. Other members, however, argued such a step would damage the ECB’s credibility.

A few members argued the euro area economy has overcome its soft patch and is seeing a sustained recovery, requiring no further easing at this point.

A few members argued more broadly that the risks to financial stability stemming from the ECB’s loose monetary policy stance outweighed the benefits, by for example laying the groundwork for future asset bubbles. One member, who called for raising the ECB’s key rates and ending asset purchases, arguing the reduced profit margins of banks mean the ECB’s policies were having a negative rather than positive impact on lending, especially to SMEs.

Among available tools, marginal preference for deposit rate cut

Of those that argued for more ECB action, members were marginally more in favor of a cut in the deposit rate as the best tool to loosen monetary policy, rather than expanding quantitative easing. Recommendations for a cut ranged from between 10 and 30 basis points, with some noting that other countries like Denmark and Switzerland have had success with significantly more negative deposit rates than the ECB.

Arguments in favor of a deposit rate cut were that it is relatively market neutral and more easily reversible than further quantitative easing. Another member noted it would be more likely to depress the euro significantly.

One member also called for removing the zero lower bound on nominal interest rates to prepare for the next recession.

At the same time, some members worried about risks to financial stability from lowering interest-rate margins, which undermines profitability and may even weaken credit provision. For that reason, one member warned that negative deposit rates must be seen as a temporary measure rather than a lasting solution.

Quantitative easing sooner rather than later; expanded asset pool

Of those in favor of expanding QE, most members argued for additional monthly asset purchases of around €20 billion. Given the risks of inflation expectations de-anchoring, supporters stressed this was not the time for the ECB to be cautious in its approach – it should expand the pace of asset purchases now and can leave the question of whether to extend QE beyond September 2016 for a later date. While some acknowledged the dangers of diminishing returns from QE, they argued that more firepower was necessary for the ECB to credibly put the economy back on a path towards achieving close to but below 2 percent inflation in the euro area. A number of members warned that the danger of de-anchoring inflation expectations should not be underestimated.

To accommodate additional monthly purchases, a number of members favored expanding the pool of assets available to the ECB, for example to sub-national debt such as German Länder debt, which is considered relatively safe. Another member suggested including all investment grade securities, public or private, and including foreign-denominated assets.

A few members argued for a more aggressive expansion of the asset pool, including a “helicopter drop” of money that would have a bigger impact on growth and inflation. One member suggested buying non-performing loans from banks and winding them down by refinancing and reselling them to banks.

Risks of overburdening central banks, need for fiscal measures and tackling NPLs

There was broad agreement, both among opponents and supporters of more ECB action, that other actors needed to step in more aggressively and could have a much bigger impact in growing the euro zone economy, credit provision, and even helping the ECB reach its inflation target.

A number of members focused on the need for additional fiscal stimulus from those countries with room to spend. One member described the Juncker plan as a form of helicopter money through the back-door. Another noted that the current geopolitical risks may have a positive economic impact by increasing military spending.

There was also broader agreement that an urgent priority is for banks to more aggressively tackle non-performing loans and clean up their balance sheets. The need for further deleveraging remained a key factor for why credit hasn’t picked up more significantly in the euro area. While one member suggested the ECB could purchase NPLs to aid the process, other members noted that this was something that must take place independently of the central bank. One member suggested the ECB could provide some indirect support if more aggressive restructuring of NPLs by banks has an adverse impact on domestic demand.


Members’ individual votes on main refinancing rate (currently 0.05%):

MemberAffiliationFixed rate            Deposit rate
José AlzolaThe Observatory GroupUnchanged       Unchanged
Marco AnnunziataGeneral ElectricUnchanged-0.15
Elga BartschMorgan StanleyUnchangedUnchanged
Andrew BosomworthPimcoUnchanged-0.3
Sylvain BroyerNatixisUnchanged-0.1
Willem BuiterCitigroup-0.2-0.2
Jacques CaillouxNomuraUnchanged-0.2
Julian CallowCatalyst EconomicsUnchanged-0.2
Eric ChaneyAxaUnchanged-0.1
Janet HenryHSBCUnchanged-0.1
Merijn KnibbeWageningen UniversityUnchangedUnchanged
Fabian LindnerIMKUnchangedUnchanged
Jörg KrämerCommerzbank + 0.25+0.2
Erik NielsenUnicreditUnchangedUnchanged
Richard WernerUniversity Southampton+ 0,8No Vote 


Frankfurt, 28th November, 2015

Jan Mallien, Christopher Cermak

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