The next stage of the ECB’s forward guidance - ABN

Nick Kounis, senior economist at ABN AMRO explained that Governing Council could give guidance on pace of rate normalisation.

Key Quotes:

"ECB Executive Board member Benoit Coeure gave a speech on forward guidance today. Mr Coeure has set out the ECB’s thinking on the impact of QE and the central bank’s exit strategy in the past, which have proved to be very informative about its subsequent actions. So his speeches are well worth following. There are a two important take-aways, most importantly that the next stage of the guidance will be to clarify the pace of interest rate normalisation."

"First of all, the Executive Board member makes a defence of the effectiveness of the ECB’s forward guidance up until now. In 2013, the Governing Council introduced state-contingent forward guidance, while in June of this year it made that guidance more specific by clarifying that interest rates would remain at their present levels at least through the summer of 2019. He argues this guidance has been successful in ‘reducing uncertainty around the expected future path of short-term interest rates’. He argues that the more specific approach to forward guidance is also vindicated by the stubbornly low inflation and that the risk of the ECB ‘failing to anticipate a much slower than usual return of inflation to pre-crisis levels – may be uncomfortably high’. Furthermore,  it is justified by the fact that ‘unwinding policy accommodation in a multi-dimensional policy space is terra incognita for both financial markets and policymakers’."

"Second, Mr Coeure argues that ‘communication about lift-off expectations is…only a first step in managing the transition towards policy normalisation’. He is not in favour of publishing a projection of the future path of short-term interest rates conditional on the macroeconomic outlook. Instead, he argues that ‘state-contingent forward guidance could clarify the pace with which policymakers expect to remove policy accommodation beyond the timing to lift-off’ as well as a ‘further clarification of our reaction function’. This seems to imply that the ECB might be more specific about the size of the interest rate increases, their frequency, and the economic circumstances that would be needed for it to follow that course as the first rate hike approaches."