The ECB taken at their word by the markets

Posted on Dec 10, 2019 2021 at 7:01Updated Dec 10, 2019 2021 at 14:00

When strategists and economists struggle to predict central bank decisions and the development of currencies like the euro, they turn to machines for help. The statements of central bankers are analyzed to pierce their ulterior motives, unspoken and other allusions, which may go unnoticed at the time.

Dominic Bunning’s team, European head of foreign exchange research at HSBC bank, scrutinized new technologies the statements of Christine Lagarde, President of the European Central Bank (ECB) and those of the other 5 members of the board, Luis de Guindos, Frank Elderson, Fabio Panetta, Isabel Schnabel and Philip Lane.

Doves and hawks

Language analysis software allows HSBC to put each member of the ECB on the cursor from “dove” (monetary easing) to “hawk” (monetary tightening). For 6 months all the members of the ECB have become a little less “doves” but they all continue to be in this camp, with the exception of Frank Elderson and Luis de Guindos who are neutral. Philip Lane is the most inclined to prolong the policy of support of the ECB followed by Christine Lagarde tied with Isabel Schnabel.

Despite inflation, the ECB does not want to worry the markets by suggesting that it could hike rates too quickly, from 2022. “The ECB does not seem concerned about the fall in the euro and its impact on inflation . Historically, the link is not very strong and periods of a decline in the euro have only been followed by a modest rise in inflation, ”emphasizes Dominic Bunning.

Incomprehensible jargon

Of the 300,000 sentences spoken by ECB members, a majority does not give any indication of their preference in terms of monetary policy (easing or tightening). They tend to “use complex and academic phraseology,” notes the British bank. Clarity is not always there, a sign perhaps of the lack of conviction of the ECB. “95% of the statements of central bankers are incomprehensible to 95% of the population”, said in 2018 Andrew Haldane, chief economist of the Bank of England.

This is also sometimes the case for media and social networks. The more complex language the ECB uses, the less media coverage it gets of its press conference in the newspapers. Its decisions are also less commented on on social networks according to a study (1).

The ECB is committed to making efforts to improve its communication, increase its audience and better explain its decisions and missions. She wants to be more attentive to citizens. In Europe, the latter tend to overestimate inflation, recall the economists of the Banque de France on the “eco notepad”. Households have a “feeling” of rising prices that is greater than reality. If they overestimate inflation too much, they will decrease their spending and their confidence in the future will deteriorate.

(1) “Does clarity make central banks more engaging? Lessons from ECB communications ”, Federico Maria Ferrara, Siria Angino, European Journal of Political Economy

Leave a Reply

Your email address will not be published. Required fields are marked *