Analysis: ECB seen struggling to keep market on side after mixed messages

  • Investors see year-end rate cut despite ECB guidance
  • Analysts say the mixed message has damaged the ECB’s credibility
  • Blame the shift in messaging, the cacophony of voices

FRANKFURT, Jan 23 (Reuters) – The European Central Bank’s policy signals no longer seem to be convincing investors, analysts say, whether it is trying to raise expectations for interest rates or lower them.

Two tumultuous years since economies began to reopen after COVID have complicated communication between central banks and financial markets, which help transmit policy moves to businesses and households.

With decades-old inflation and the war in Ukraine fueling economic volatility, global peers including the US Federal Reserve and the Bank of Japan have often struggled to send clear and consistent signals.

But four analysts told Reuters that the ECB’s problems in doing so were more acute because of frequent changes in its policy message and what one described as a cacophony of voices among policymakers from the 20 countries that use the euro. they

“They are simply not consistent in their communication and explaining their reaction functions,” Carsten Brzeski, global head of macro at Dutch bank ING, said.

“The message keeps changing. That’s why the market has abandoned them.”

Just over a year ago, ECB President Christine Lagarde was trying to convince investors that they were wrong to bet on rising borrowing costs because high inflation would prove transitory.

Earlier in February – even before Russia invaded Ukraine – he recognized the risk of inflation and the possibility of an interest rate increase.

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Now Lagarde has the opposite problem: investors will not believe her when she says the ECB will continue to raise rates at a rapid pace to bring inflation down to 2% in two years from almost five times this level now.

The ECB chief is pushing back, telling investors in Davos last week they should “review their position” – adding weight to earlier comments from Dutch and Latvian politicians.

The ECB declined to comment.

“They are doing their best to communicate clearly now but they are suffering the consequences of being behind the curve last year, and this is the price to pay for changing guidance as often as they do,” Danske Bank economist Piet Haines Christiansen. said.


After a few months last year where it was criticized for not acting while other major central banks did, things started to improve for the ECB.

A strong regime of rate hikes that began in July stabilized the euro and increased borrowing costs in the autumn – just what the central bank said was needed to lower inflation.

But in December, with signs of peak inflation, a looming recession, and ECB Chief Economist Philip Lane raising the prospect of smaller rate moves, investors began to doubt the ECB’s appetite for going much longer.

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He responded by committing at his December 15 meeting to several rate increases, although at 50 basis points each rather than the 75 bps in September and October.

Now with falling inflation and talk of smaller rate increases by the Fed – which often influences other central banks due to the status of the dollar as the world’s reserve currency – investors are skeptical again.

Money market prices have the ECB’s deposit rate peaking at 3.3% in July – a sharp drop from the 3.5% expected at the end of the year – and a reduction by December.

Analysts said the ECB put itself in a box when Lagarde said last month it would raise rates by 50 bps at “its next meeting, and possibly at the one after this, and possibly after that”.

“With the kind of commitment he gave, you lose credibility if you don’t keep it,” Dirk Schumacher, head of European macro research at Natixis, said. “That would be a problem for any central bank.”

With the euro zone economy now better than expected, he argued that Lagarde should ease away from this December promise.


Lagarde’s commitment also baffled ECB watchers as the central bank had previously said it would no longer make such public predictions – known as forward guidance – but instead make each decision based on incoming data. .

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said, “They are facing the contradiction of saying that they would go meeting after meeting while committing to multiple rate hikes.”

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But Danske’s Christiansen said the ECB cannot always just follow investors, especially when the situation is volatile.

“The ECB does not have the luxury to change its opinion as often as the markets. This of course leads to a tug of war between the ECB and the markets on the narrative,” he added.

Lagarde’s remarks in December represented a compromise to unify the ECB’s Governing Council, sources told Reuters last month. Some members, like Lane, sought changes to smaller rate increases while others, like Isabel Schnabel, wanted a bigger move.

Schnabel and Lane often voice differing views on policy in public and Lagarde, who is not an economist, has avoided judging between them, seeking instead to reflect the consensus view of the Board of Governors.

Conversely, investors are aware that a message from Fed chair Jerome Powell may sway their views on other policies, analysts said.

ING’s Brzeski said that the ECB lacked a clear mind in its Governing Council that could lead the market like Lagarde’s predecessor, Mario Draghi.

“The cacophony of divergent voices and the lack of clarity about who is the leading voice continue to hurt the ECB,” Brzeski said.

Edited by Catherine Evans

Our Standards: The Thomson Reuters Trust Principles.


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