ECB is trying to control the market
2023.01.23 03:46
ECB is trying to control the market
By Ray Johnson
Budrigannews.com – Analysts assert that the European Central Bank’s policy signals no longer appear to persuade investors, regardless of whether it is attempting to lower or raise their expectations for interest rates.
The turbulent two years since economies began to reopen following COVID have made it difficult for central banks to communicate with financial markets, which help spread policy changes to households and businesses.
Global peers like the U.S. Federal Reserve and the Bank of Japan have frequently struggled to send clear and consistent signals with inflation at multi-decade highs and the war in Ukraine feeding economic volatility.
However, four analysts told Reuters that the ECB’s difficulties in doing so have been more severe as a result of frequent revisions to its policy message and what one analyst referred to as a “cacophony of voices” among eurozone policymakers.
Carsten Brzeski, global head of macro at Dutch bank ING, stated, “They are simply not consistent in their communication and explaining their reaction function.”
“The message shifts frequently. Markets gave up on them because of this.
A little over a year ago, ECB President Christine Lagarde tried to convince investors that betting on rising borrowing costs was a mistake because high inflation would only last so long.
She had acknowledged the growing risks of inflation and the possibility of an increase in interest rates by the beginning of February, even before Russia invaded Ukraine.
Lagarde now faces the opposite challenge: When she says that the European Central Bank (ECB) will keep raising rates quickly to bring inflation down to 2% within two years from nearly five times that level now, investors won’t believe her.
The head of the ECB is retaliating by telling investors to “revise their positions” last week in Davos, supporting earlier statements made by Dutch and Latvian policymakers.
The ECB did not respond.
According to economist Piet Haines Christiansen of Danske Bank, “They are trying their utmost to communicate clearly right now, but they are suffering the consequences of having been behind the curve last year, and this is the price to pay for changing guidance as frequently as they have,”
Things had started to get better for the European Central Bank (ECB) after it had been criticized for a few months last year for not acting when other large central banks did.
The euro was stabilized in July by a robust diet of rate hikes, which raised borrowing costs by autumn—just what the central bank said was necessary to lower inflation.
However, investors had begun to question the ECB’s appetite to continue for a significant amount of time by December, when indicators of inflation peaking, a recession looming, and ECB Chief Economist Philip Lane raising the possibility of smaller rate changes.
In response, it pledged at its meeting on December 15 to increase rates by 50 basis points instead of 75 bps in September and October.
Investors are skeptical once more in light of falling inflation and talk of smaller Fed rate hikes—the dollar is the world’s reserve currency, so it often has an impact on other central banks.
According to money market pricing, the ECB’s deposit rate will be cut by December, with a peak of 3.3% in July—a significant decrease from the 3.5% anticipated at the beginning of the year.
When Lagarde said last month that the ECB would raise rates by 50 basis points at its “next meeting, and possibly at the one after that, and possibly thereafter,” analysts said that the ECB had locked itself in.
Dirk Schumacher, head of European macro research at Natixis, stated, “If you don’t stick to it, you lose credibility with the kind of commitment that she gave.” Any central bank would have to deal with that.”
He argued that Lagarde should back off from her December promise because the economy of the euro zone is now doing better than expected.
ECB observers were also perplexed by Lagarde’s commitment because the central bank had previously stated that it would no longer make such public predictions, which are referred to as forward guidance, but would instead make each decision based on incoming data.
Frederik Ducrozet, Pictet Wealth Management’s head of macroeconomic research, stated, “They’re facing the contradiction of saying they would go meeting-by-meeting while at the same time committing to several rate hikes.”
But Christiansen of Danske said that the ECB can’t always just follow investors, especially in volatile situations.
The ECB does not have the luxury of changing its mind as frequently as the markets. Naturally, this results in a narrative tug-of-war between the markets and the ECB,” he added.
Sources told Reuters last month that Lagarde’s words in December represented a compromise to bring the ECB’s Governing Council together. Some members, like Lane, wanted to move to smaller rate increases, while others, like Isabel Schnabel, wanted to make a bigger change.
Lagarde, who is not an economist, has chosen instead to reflect the Governing Council’s consensus view rather than deciding between Schnabel and Lane’s divergent policy perspectives.
According to the analysts, investors, on the other hand, are aware that a message from Fed Chair Jerome Powell can prevail over the opinions of other policymakers.
Brzeski of ING stated that the ECB lacked a clear thought leader on its Governing Council who could guide markets like Mario Draghi, Lagarde’s predecessor.
Brzeski stated, “The ECB continues to be hurt by the cacophony of divergent voices and the lack of clarity on who is the leading voice.”
