10th Aug 2022

Experts criticise ECB's 'coded language' on interest rates

  • The ECB takes its decisions based on consensus (Photo: European Central Bank)

Inflation in the 15-member eurozone could have been lower if the European Central Bank (ECB) had explained its monetary decisions more openly, according to a fresh study.

The analysis, entitled "Transparency and Governance" by the London-based Centre for Economic Policy Research, published on Thursday (7 February), claims that "At a time when euro area inflation expectations are ringing alarm bells, ECB credibility is sliding down."

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Its authors argue that financial markets face greater uncertainty about the bank's next policy move and direction, and urge the Frankfurt-based bank to be more open about the reasoning behind its decisions - not only towards economic experts but also the general public.

One solution for the bank to retain its independence from political pressure - such as recently exerted by France - would be "better communication" based on "a clear strategy and a high degree of transparency," the report suggests.

A practical means to achieve this could be by publishing voting records in the Governing Council, the ECB's main decision-making body, which consists of six members of the Executive Board, plus 15 governors of the national central banks of the euro area.

"By allowing the public to weigh its members' evolving views, the balance of votes leads to a better understanding of how the Governing Council responds to economic information," argue the analysts.

They maintain that the ECB's reference to "consensual" decisions is vague and it encourages the interpretation that decisions are made unanimously, which the London think-tank considers "simply incredible."

Scrap coded language

Moreover, the authors of the study say the bank's policy effectiveness would improve if it "anticipated interest rate paths", as several central banks have started to do, instead of using the current code-word communication to signal its future moves.

They suggest that while it may be a good way to prevent pressure, it leads to a risk of misinterpretation and its imprecision harms the effectiveness of monetary policy.

Commenting indirectly on the issue at a press conference in Frankfurt on Thursday, the ECB's chief Jean-Claude Trichet maintained that the central bank has pursued a policy of high predictability and will continue to do so, arguing that its surprises were "extremely rare".

"We are clear on our own strategy; we are clear on our goal and on our monetary policy concept ... And there are a lot of reasons why we will be predictable" in the future, he said.

However, he stressed that "predictability does not mean that we would pre-commit [to some type of monetary decisions] in the medium term," adding that just because financial markets know the ECB has been "constantly alert", its performance in keeping a lid on the eurozone's inflation has been "exceptionally successful".

Price stability is one of the key policy goals of Europe's monetary union, seen as necessary for achieving sustainable economic growth and job creation.

Euro plunges after negative signals

Meanwhile, Thursday's statements by Mr Trichet about gloomy expectations for the eurozone's growth have led to a plunge of the euro on world markets.

Economic fundamentals were sound but risks were on the downside, the ECB chief said when presenting the reasoning behind the bank's unanimous decision to keep the interest rates unchanged at the six-year high of four percent.

He stressed that the bank would keep focused on curbing inflation, which accelerated in the monetary union to 3.2 percent in January - a 14-year high - and above the ECB's threshold of two percent for the fifth month.

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