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Analysis – ECB struggles to keep markets stable after mixed messages

By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) – The European Central Bank’s policy signals no longer appear to convince investors, regardless of whether it tries to boost Interest rates interest rate expectations or lower interest rates.

It has been a tumultuous two years since the economy began to reopen after COVID complicated communication between central banks and financial markets, helping to pass on policy moves to businesses and households.

With inflation at multi-decade highs and the war in Ukraine exacerbating economic volatility, global peers including the U.S. Federal Reserve and Bank of Japan have often struggled to send clear and consistent signals.

But four analysts told Reuters the ECB’s problem with doing so is more serious because its policy message changes frequently, and one analyst said the source from 20 voices of policymakers dissonant) countries that use the euro.

“They are fundamentally inconsistent in communicating and explaining their reaction function,” said Carsten Brzeski, global head of macro at Dutch bank ING.

“The messages keep changing. That’s why markets are abandoning them.”

Just over a year ago, ECB President Christine Lagarde ( Christine Lagarde is trying to convince investors that they are wrong to bet on rising borrowing costs because high inflation will prove temporary.

The author had already acknowledged rising inflation risks and the possibility of rate hikes in early February – even before Russia invaded Ukraine.

Now, Lagarde has the opposite problem: Investors don’t like it when she says the ECB will continue to raise interest rates rapidly to bring inflation down from nearly five times to 2% in two years. Will believe her current level.

The ECB president is hitting back, telling investors in Davos last week that they should “revise their stance” – adding weight to earlier comments from Dutch and Latvian policymakers.

ECB declined to comment.

“They are doing their best to communicate clearly now, but they are suffering the consequences of falling behind the curve last year,” said Danske Bank economist Piet Haynes Christiansen. Haines Christiansen, said: It has been criticized for not acting when other big central banks have acted, and things have started to turn around for the ECB.

Steady rate hike program from July The euro and raised interest rates lowered borrowing costs ahead of autumn – exactly what the central bank said was needed to lower inflation.

But by December, recession looms as inflation peaks In a sign that ECB Chief Economist Philip Lane raised the outlook for a smaller rate move, investors are starting to doubt the ECB’s willingness to hold on for longer.

Its response was in Commitment to the meeting in December will raise rates several more times, although each hike will be in the order of 15 basis points rather than 20 bps in Sept and Oct.

Now, with inflation falling and talk of smaller Fed rate hikes – due to the dollar as the world’s Reserve currency status, which often affects other central banks – investors are again skeptical.

Money market pricing suggests the ECB’s deposit rate peaked at 3.3% in July – higher than expected at the start of the year 3.5% – and a rate cut by December.

Analysts said that when Lagarde said last month that she would be at the “next meeting, probably after that, Possibly after that “by the time it raises 50 basis points, the ECB is already in trouble.

Dirk Schumacher, head of European macro research at Natixis said, “With her making The kind of promise that if you don’t keep it, you lose credibility. “That’s a problem for any central bank.”

Given that the eurozone economy is now better than expected, he thinks Lagarde should back away from her December pledge.

Tug of War

Lagarde’s pledge also confused ECB watchers, as the central bank had previously said it would no longer make such public forecasts – known as forward guidance – and instead base every decision on incoming data.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said: “They are faced with the contradiction of saying they will do it meeting-by-meeting while promising multiple hikes. “

But Danske Bank’s Christiansen said the ECB cannot always follow investors, especially in times of turmoil.

“The ECB does not act like The market has the luxury of changing views as often as it does. This of course leads to a tug-of-war between the ECB and the market over the narrative,” he added.

Lagarde’s comments in December represented a move to unify the ECB’s Governing Council, sources told Reuters last month. Compromise. Some members, such as Lane, seek a shift to a small rate hike, while others, such as Isabel Schnabel, want a larger move.

Schnabel and Lane often discuss publicly Occasions and Lagarde expressing differing views on policy, he is not an economist and did not adjudicate between them but seeks to reflect the consensus view of the council.

Analysts said, By contrast, investors know that Fed Chairman Jerome Powell’s message can trump the opinions of other policymakers.

ING’s Brzeski said, The ECB lacks a clear thought leader on its Governing Council who could steer the markets the way Lagarde’s predecessor Mario Draghi did.

Leading voices have been hurting the ECB,” said Brège Ski said.

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