It took an outbreak of global financial turmoil for the European Central Bank to finally embrace the “meeting-by-meeting” approach it has claimed to have been following for months.
(Bloomberg) — It took an outbreak of global financial turmoil for the European Central Bank to finally embrace the “meeting-by-meeting” approach it has claimed to have been following for months.
Officials conspicuously dropped those words from their statement on Thursday, after delivering a half-point increase in interest rates that they flagged at their last gathering six weeks ago and hinted at even before that.
But they made clear that such guidance on future moves has now been abandoned, pledging to be “data dependent,” with considered judgments on each decision in turn now the overarching mantra.
That will give the ECB more flexibility as it navigates an increasingly complicated backdrop — even if investors get fewer pointers on where monetary policy may be headed.
The shift represents a remarkable twist after disagreements on heeding the “meeting-by-meeting” language escalated publicly just days before the world changed, as Silicon Valley Bank failed and Credit Suisse Group AG grasped for a lifeline from the Swiss National Bank.
Former ECB Chief Economist Peter Praet said officials had done the right thing by not telling the market what they were going to do next.
“We’ll see,” he told Bloomberg Television. “It’s ‘meeting-by-meeting.’”
With underlying inflation reaching a new euro-era high in February, ECB hawks had begun to map out potential policy moves into the second half of the year. That stretched the meaning of “meeting-by-meeting,” despite the terminology being a key message ever since rate hikes began in July.
Finally, after Austria’s Robert Holzmann started speculating on a total of four half-point moves to come, Bank of Italy Governor Ignazio Visco’s patience snapped just over a week ago.
Criticizing the apparent use of forward guidance in defiance of the ECB’s agreed approach, he insisted that “uncertainty is so high” — a justification that turned out to be uncannily prescient.
In a first demonstration of how the new approach is panning out, Estonian policymaker Madis Muller declined to speculate on future decisions given current uncertainty.
“I wouldn’t want make predictions in a situation where it’s not known what the economic indicators are for the coming months and what else could happen in the meantime,” he told local radio.
Money markets are placing 50% odds on a quarter-point hike in May with a full 25-basis-point increase priced by July and a 3.35% peak by October.
President Christine Lagarde is in curious and unfamiliar territory: Having so long been the frequent source of international turmoil because of its deficient architecture, the euro zone isn’t currently the problem.
Officials insist the banking system the ECB supervises is in decent health, even if some individual institutions may be vulnerable to rising rates. But events in the US and Switzerland are forcing policymakers in Frankfurt to prioritize financial stability even though their inflation shock is far from under control.
That’s why the ECB has now found itself following through on a move that at first glance is aggressive — a half-point increase in the deposit rate to the highest since 2008 — while essentially revealing few intentions on what to do next.
“If the baseline as we have it was confirmed and was to persist, we would have more ground to cover,” Lagarde said, while also admitting that it’s “not possible to determine at this point in time” a future path for rates.
The desire to avoid signaling a sense of panic helped motivate officials to follow through on their promised half-point increase, according to people familiar with the matter. Meanwhile, a live discussion continues on the need for more tightening if the turbulence subsides, they said.
Praet reckons the juxtaposition of action and hesitation on Thursday was the right decision — not to have delivered on a hike consistently signaled by the ECB would indeed have sent a message of distress that risked spooking investors; committing further was equally unwise.
The outcome may effectively amount to a small victory for doves such as Visco, though it’s also just a prelude for future arguments over what to do.
What’s for sure is that the negotiated outcomes that led to an awkward period of apparently contradictory messaging — being “data dependent,” doing things “meeting-by-meeting,” but also telegraphing specific moves weeks in advance of them happening — seems to be over for now.
“They did the only thing they could do: deliver the 50 because they had tied themselves to this silly mast of pre-announcing,” Unicredit Group Chief Economist Erik Nielsen told Bloomberg Television. “I’m very happy to hear they don’t do this any more.”
Bank of France Governor Francois Villeroy de Galhau summed up the decision as a two-pronged message to investors on the ECB stance.
“The priority is fighting inflation, and we have one commitment, which is bringing inflation back toward 2%,” he said on BFM Business television on Friday. “We have sent a signal of confidence that is strong and double: it’s confidence in our anti-inflation strategy and confidence in the solidity of European and French banks.”
–With assistance from Alix Steel, Guy Johnson, Ott Tammik, William Horobin and James Hirai.
(Updates with Muller in 12th paragraph, markets in 13th Villeroy in final.)
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