>> GROUP: Shadow ECB Council / EZB-Schattenrat  Willem Buiter

Willem Buiter: Growth continues to surprise on the upside but inflation continues to creep up as expected. This means there is more slack in the economy than we thought there was.

There is no need to change the substance of the forecasts implied by the ECB’s current communication strategy: QE to continue until at least September 2018, possibly till the end of the year. First rate hike sometime in the second half of 2019. The form of its communication strategy should change, however, with only the President speaking in public about matters that anticipate future policy actions. The rest is silent on possible/likely future policy moves and restricts itself to ‘The history of monetary policy’, ‘The future of monetary policy’, ‘The ethics of monetary policy’, ‘ The distributional consequences of monetary policy’, ‘The evils of inflation’, ‘The benefits of inflation’ etc. etc. That way we may achieve forward guidance rather than the forward misguidance of the past.

The strength of the euro is inexplicable and undesirable. Larger and longer duration QE would likely do little to remedy this. Open mouth operations (talking down the euro in competition with Mr Mnuchin) would be one possibility. The other one would be a further interest rate cut. Switzerland, Sweden and Denmark have shown it is possible to have the deposit rate at -75bps. The refi rate could be set at, say -30bps and the marginal lending facility at 0bps.
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