Today’s European Central Bank meeting is important for both the euro and market participants, but will the central bank’s communication be as misleading as before?
The European Central Bank (ECB) meeting today is likely to be one to remember because last time’s misleading communication about asset purchases left market participants guessing about the next move.
Communication has been one of the biggest problems for central banks; especially the language and jargon used. Some steps were taken to avoid miscommunication – for example, forward guidance — but the ECB took a step back after Christine Lagarde took over from Mario Draghi as ECB president.
Nowadays, the ECB talks about a “holistic and multifaceted way” of thinking of financing conditions, or it vows to “significantly” increase asset purchases under its PEPP program. Even seasoned ECB watchers who do this for a living have a hard time understanding what the ECB is saying. As the chart shows, PEPP purchases did not increase significantly after the previous promise.
Disagreement Inside the Governing Council?
Instead of taking a clear, transparent approach as suggested by the forward guidance principle, the ECB chooses the opposite. The problem with this approach is that it usually hides something, and in this case, it may mean a disagreement inside the Governing Council.
The president’s task is to unite the views of the Governing Council so that the ECB speaks with one voice. Draghi mastered this; Lagarde doesn’t seem to have.
It may be that the Nordic states, led by Germany, are reluctant when it comes to more easy money. A recent poll gave Germany’s Green Party a steady lead ahead of the ruling Christian Democratic Union (CDU). This suggests that the upcoming elections could be difficult for Merkel’s party and the ECB may change its tune if the government changes.
These are mere speculations, but the fact remains that the ECB did not deliver on its previous promise. At a time of crisis, the members should be united, not divided.
Long story short, the ECB may have a tough time explaining its actions.