The Impact of ECB Communication on Financial Market Expectations

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. (2006), that quantifies the contents of the ECB's introductory statements, we find that communication affects the term structure of interest rates in the medium run over a horizon between five months to one year. Our results suggest that financial market agents expect the ECB to prepare them for a change in interest rates well in advance. However, judging upon the dynamics of the response, the exact timing of a decision is less foreseeable. Disentangling the effects of ECB statements on prices, the real and the monetary sector, we provide evidence that especially the ECB's interpretation and forecasts of price developments represent important news to financial market agents. Terms of use: Documents in EconStor may JEL classification: E43, E44, E58

Does it Pay to Watch Central Bankers’ Lips? The Information Content of ECB Wording

“…Hence, the rhetoric signals sent out by the central bankers should offer insights about the central bank's perceptions and intentions. Lamla and Rupprecht (2006) underline this idea with regard to price developments: the way a central bank regards current inflation trends as transitory or permanent is essential to transform current inflation data into interest rate expectations. This should be particularly relevant in times when a central bank is perceived as missing its targets.…”

“…Studies related to the impact of communication on exchange rates are Fratzscher (2004), Jansen and de Haan (2004b), or Beine and Lecourt (2004). Lamla and Rupprecht (2006) establish a link between ECB statements and the term structure of the interest rate.…”

The ECB’s Monetary Analysis Revisited

“…On the one hand, looking at intraday market reactions across the yield curve, Coffinet and Gouteron (2007) report that market rates between a horizon of one and five years react significantly to M3 growth surprises over their full sample period from November 2000 to November 2006. However, as in Lamla and Rupprecht (2006) there is no significant impact on interest rates at shorter horizons and, somewhat unexpectedly perhaps given the longer-run nature of the ECB's monetary analysis framework, at horizons beyond five years. And, even more importantly, Coffinet and Gouteron (2007) show that across all interest rate horizons the impact of M3 news has dramatically decreased over time, essentially becoming insignificant before or around the time of the ECB's monetary strategy clarification in 2003.…”

“…Other studies show that financial markets have ceased paying attention to Governing Council's communications regarding monetary analysis and react mostly to price news, or the economic analysis. In particular, based on the analysis of high-frequency interest rate data for horizons of up to twelve months, Lamla and Rupprecht (2006) find that the ECB's comments on price developments-which tend to be based on its economic analysis-during the press conference after Governing Council meetings are strongly reflected in financial market activity controlling for other determinants, while there is no discernible reaction whatsoever to the ECB's interpretation of developments in monetary aggregates.…”

The ECB’s Monetary Analysis Revisited

“…Other studies show that financial markets have ceased paying attention to Governing Council's communications regarding monetary analysis and react mostly to price news, or the economic analysis. In particular, based on the analysis of high-frequency interest rate data for horizons of up to twelve months, Lamla and Rupprecht (2006) find that the ECB's comments on price developments-which tend to be based on its economic analysis-during the press conference after Governing Council meetings are strongly reflected in financial market activity controlling for other determinants, while there is no discernible reaction whatsoever to the ECB's interpretation of developments in monetary aggregates. 69 Conrad and Lamla (2007) show that, based on the high-frequency response of the euro-U.S. dollar exchange rate, ECB information on price developments are considered news by forex market participants, but that the ECB's assessments of developments in the monetary sector are not.…”