THE European Central Bank (ECB) has been caught in a controversy over the way it communicates with investors.
Chief economist Philip Lane held a number of phone calls with selected ECB watchers soon after it announced policy decisions, as first reported by the Wall Street Journal on Tuesday.
This practice highlights a tension at the heart of modern central bank communications: If you seek to influence markets to improve the functioning of monetary policy, there’s a risk of appearing too close to investors – or at least some of them. The lesson for the ECB is that it must ensure there’s a level playing field among who gets access to information (and policymakers), to avoid any perception of bias. This may mean avoiding these calls altogether.
Today’s central banks are much more interested in talking to the financial markets because communication has become an essential part of their monetary toolkit. The ECB – like many of its peers – has a policy of forward guidance, setting out the probable future course of monetary policy.
At present it wants investors, companies and households to believe that it won’t raise rates – or stop buying bonds – for some time into the future. That way it can make sure that financial market conditions stay smooth and consumers and companies feel relaxed about spending and taking on more debt.
For forward guidance to work, central banks must be forthcoming about their intentions. The ECB holds a press conference after each policy meeting of its governing council, and it publishes anonymous minutes of its internal discussions. Members of its executive board and national central bank governors regularly give interviews and speeches to tell the public about the future of monetary policy. These interventions are published on the websites of these institutions. As a result, they are uncontroversial.
Central bankers sometimes also feel that they need to discuss their policy choices privately with important market operators – such as a big commercial bank’s chief economist – to get their message across more clearly. The quid pro quo is that the policymakers get useful feedback on what the market thinks.
This is a trickier situation to handle fairly and transparently. The ECB says that Lane didn’t give away any additional information to the selected recipients of his phone calls, compared with what the central bank had already announced. However, a huge amount of effort is expended by market participants on interpreting the messaging around any central bank announcement, so any perceived edge will be deemed important. Competitors from other banks that haven’t had the pleasure of discussing the ECB’s economic outlook and its monetary policy strategy with its chief economist will understandably feel aggrieved.
One particular meeting captures this problem. In March, during a post-decision press conference at the height of the pandemic panic, President Christine Lagarde caused the bond yields of Italy, Spain and other southern European countries to spike after she said the ECB’s job wasn’t to narrow the spreads between those yields and Germany’s.
Lagarde retracted her comments soon after in an interview, and Lane reinforced her rapid turnaround in a public blog post the following day. But he’d also spoken privately to some ECB watchers right after Lagarde’s press conference. What if they understood the ECB’s true intentions before others? This would have been an advantage for them and for their clients.
The central bank has taken some steps to avoid accusations of favouritism. It rotates the group of people who have access to the chief economist after these events, and it publishes the lists of these calls. But even these measures may seem insufficient to reassure all investors that there is indeed a level playing field.
If the central bank feels it must better explain its message, it can do so publicly – as it often does. Standing above suspicion is worth more than some nuggets of market intelligence. — Bloomberg
Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. Views expressed here are the writer’s own.