By Paul Carrel
FRANKFURT, July 12 (Reuters) – In just a week, European
Central Bank policymakers have blurred their forward guidance on
interest rates with a cacophony of comment that risks
undermining the ploy.
Abandoning its tradition of never pre-committing on future
rate moves, the ECB said last Thursday it would keep its
interest rates at present or lower levels for an “extended
period” – its first use of forward guidance.
ECB President Mario Draghi, who delivered the message at his
monthly news conference after a meeting of the 23-man Governing
Council, described the move as “unprecedented”.
Beginning the next day, Council members began offering their
own, varied interpretations on exactly what the guidance means
and just how big a deal their use of the ploy really is.
First Erkki Liikanen said the move was good for as long as
the economy is weak, then Joerg Asmussen said the extended
period “is not six months, it’s not 12, it goes beyond”, though
he was quickly hauled in by ECB headquarters.
Later, Jens Weidmann insisted the ECB had not “tied itself
to the mast” with the guidance, and would raise rates if
inflation climbs. Then Benoit Coeure, generally seen as a policy
dove, said the guidance would be reviewed each and every month.
The result is that while the forward guidance initially
helped persuade markets that the ECB is not about to follow the
U.S. Federal Reserve and begin exiting its ultra-loose policy
stance, the ECB risks talking away this ‘decoupling’ effect.
“The ECB’s message is getting muddied by what seems to be
its own internal misconception of what its forward guidance
means,” Lena Komileva at G+ Economics wrote in a research note.
The impact of the policy statement is already fading.
Shorter-dated euro zone sovereign bond yields fell after
Draghi’s declaration but have since rebounded, and forward rates
on three-month Euribor interbank lending rates initially fell
before edging up again. Forward euro zone overnight Eonia rates
have also started firming again.
The experience of other central banks shows such guidance is
by nature difficult to manage. This is all the more the case
when dealing with 23 policymakers from different countries, with
different native languages.
LIMITED SHELF LIFE
Across the Atlantic, Federal Reserve members are at odds.
About half of the Fed’s policymakers felt the U.S. central
bank’s bond-buying stimulus should be brought to a halt by year-
end when they met in June but many wanted reassurance the U.S.
jobs recovery was on solid ground before any policy retreat.
Unlike the Fed and the Bank of England, the ECB does not
publish minutes of its meetings, which can make its policy
communication more opaque.
Furthermore, ECB policymakers often tailor their comments to
their own constituencies. Weidmann, for example, has to assure a
wary German public that the ECB is not playing fast and loose
with inflation.
The ECB guidance is also less specific than the Fed’s.
Aside from calling time on its quantitative easing
programme, the Fed has promised to keep its main interest rate
near zero at least until the unemployment rate falls to 6.5
percent and as long as inflation stays below 2.5 percent.
With the ECB guidance subject to monthly reviews, it really
amounts to a formal recognition of what markets expected anyway.
A Reuters poll conducted before last week’s meeting showed
analysts saw rates on hold until at least the end of next year.
Sassan Ghahramani, CEO of U.S.-based SGH Macro Advisors,
which advises hedge funds, said guidance is powerful when it
reinforces what markets already suspect or would like to see, as
with Draghi’s commitment to low rates for an extended period.
“But it has a limited shelf life and usefulness if it is
left without an explicit anchor and open to constant
interpretation of what data developments may pull the central
bank off of the promise,” he said.
For more impact, the ECB may yet need to back up its vow to
keep rates low with more specific guidance, or other measures.
Draghi said on Monday it remained to be seen whether the
ECB’s use of guidnace would be sufficient.
“For the ECB to get greater bang for its buck, it will
either need to link its commitment more explicitly to its
inflation target and in the process deliberately give up some
flexibility,” said Ghahramani.
“Perhaps easier for them and less controversial, put some
‘money behind their promise’ by offering a new, low fixed rate
LTRO to banks even if they are not clamouring for the money.”
Although ECB policymakers are sending mixed messages over
guidance, they agree that rates should remain low in the absence
of inflationary pressures.
The next ECB staff forecasts are due in September. In past
years, the staff have not been afraid to project inflation above
the ECB’s target of just below 2 percent but in June they saw it
at just 1.3 percent next year.
“Behind the divergence (in Governing Council views) are
different expectations of how quickly the economy will recover,”
said Christian Schulz at Berenberg bank, a former ECB economist.
“The key message is that the ECB does not want to raise rates
prematurely.”
(Editing by Mike Peacock)
