Breaking down the ECB Accounts
The ECB accounts (i.e., the equivalent of the FOMC Minutes in the United States) corresponding to the June meeting was released yesterday.
The report shows a record number of words used in detailing, and highlights how the ECB may need to improve communication to the market.
The way a central bank chooses to communicate is particularly important to financial markets, as high-frequency trading algorithms often buy or sell a currency based on what a document may or may not show. For instance, the FOMC Statement in the United States is “scanned” by trading algorithms in milliseconds, looking for changes in the wording from the previous release.
Details of the ECB June 2020 Meeting
One of the most underrated tools of modern central banking is called forward guidance. It represents the entire arsenal a central bank chooses to use to fill its mandate of price stability and, in some cases, job creation. The aim is to anchor inflation expectations in two years’ time around the inflation-targeting goal.
Staff economic projections, minutes of central banks’ meetings, or speeches, and TV appearances, are part of forward guidance. In the case of the ECB, the accounts, published three weeks after the minimum bid rate announcement, are recently introduced as a new tool to increase transparency.
They reveal a detailed record of the ECB’s Governing Council meeting and often provide insights market participants may have missed. Yesterday’s release did send the Euro lower, especially against the USD, albeit the common currency recovered toward the end of the trading day.
For the first time since their introduction, the ECB accounts’ words count exceeded 10,000. It is, perhaps, because the review of financial market developments took more time than usual, due to the COVID-19 health crisis. Or, because it is increasingly difficult to assess the global economic damage and the impact on the Eurozone.
Regardless of the reason, the increase in the number of words reflects the challenges the ECB faced and still faces during the crisis – high unemployment and extremely low inflation, naming a couple. On top of that, the threat to its independence posed by the German constitutional court earlier this year definitely contributed to the discussions on the Governing Council.
For Euro traders, the ECB accounts are a relatively new instrument to dive into the central bank discussion and look for confirmation in the fundamental analysis for a trade. This time, the net takeaway is that the PEPP purchases respect the proportionality condition and that the ECB acted according to its mandate.