# Analysis-ECB seen struggling to keep market on side after mixed messages
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2023-01-23
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Eurozone Investors Skeptical of ECB's Mixed Signals on Interest Rates
Meta Description: Analysts say ECB's changing policy signals amid economic uncertainty have led to investor scepticism, complicating efforts to transmit policy moves
URL: https://financedigest.com/analysis-ecb-seen-struggling-to-keep-market-on-side-after-mixed-messageshtml

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By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) – The European Central Bank’s policy signals don’t seem to convince investors any more, analysts say, whether it is trying to raise their expectations for interest rates or lower them.

Two years of tumult since economies began reopening after COVID have complicated central banks’ communications with financial markets, which help transmit policy moves to businesses and households.

With inflation at multi-decade highs and war in [Ukraine feeding economic](https://www.financedigest.com/gazprom-gas-cut-tempers-economic-hopes-after-ukraine-grain-deal.html "Gazprom gas cut tempers economic hopes after Ukraine grain deal") volatility, global peers including the U.S. Federal Reserve and Bank of Japan have often struggled to [send clear and consistent signals](https://www.financedigest.com/stocks-dollar-little-changed-as-inflation-data-sends-mixed-signals.html "Stocks, dollar little changed as inflation data sends mixed signals").

But four analysts told Reuters that the ECB’s problems doing so have been more acute because of frequent changes to its policy message and what one described as a cacophony of voices [among policymakers from the 20 countries](https://www.financedigest.com/china-us-india-among-the-top-36-countries-for-marketplace-expansion-in-2018.html "China, US, India among the top 36 countries for marketplace expansion in 2018") that use the euro.

They are simply not consistent in their communication and explaining their reaction function,” Carsten Brzeski, global head of macro at [Dutch bank](https://www.financedigest.com/dutch-online-bank-bunq-applies-for-u-s-banking-licence.html "Dutch online bank Bunq applies for U.S. banking licence") ING, said.

“The message keeps changing. This is why markets gave up on them.”

Just over a year ago, ECB President Christine Lagarde was trying to persuade investors they were wrong to [bet on rising borrowing costs](https://www.financedigest.com/bmw-bets-on-design-and-recycling-not-mining-to-lower-battery-costs.html "BMW bets on design and recycling, not mining, to lower battery costs") because high inflation would prove transitory.

By early February – even before Russia invaded Ukraine – she had acknowledged [mounting inflation risks and the possibility of an interest rate rise](https://www.financedigest.com/shares-rise-but-concern-mounts-over-inflation-flare-up.html "Shares rise, but concern mounts over inflation flare-up").

Now, Lagarde has the opposite problem: [investors won’t believe her when she says](https://www.financedigest.com/virgin-orbit-says-space-startup-in-talks-with-potential-investors.html "Virgin Orbit says space startup in talks with potential investors") the ECB will keep raising rates at a brisk pace to bring inflation down to 2% within two years from nearly five times that level now.

The [ECB chief is pushing](https://www.financedigest.com/hawkish-ecb-comments-push-up-rate-hike-expectations.html "Hawkish ECB comments push up rate-hike expectations") back, telling investors in Davos last week they should “revise their positions” – adding weight to earlier comments from Dutch and Latvian policymakers.

The ECB declined to comment.

They are trying their utmost to communicate clearly right now but they’re suffering the consequences of having been behind the curve last year, and this is the [price to pay](https://www.financedigest.com/shell-energy-to-pay-for-overcharging-price-cap-customers-ofgem.html "Shell Energy to pay for overcharging price cap customers -Ofgem") for changing guidance as frequently as they have,” Danske Bank economist Piet Haines Christiansen said.

BOXED IN?

After a few months last year in which it was criticised for not acting while other [big central banks](https://www.financedigest.com/big-banks-can-be-challengers-too.html "Big banks can be challengers too") did, things had started to improve for the ECB.

A robust diet of rate hikes that started in July stabilised the euro and raised borrowing costs by the autumn – just what the central bank said was needed to [lower inflation](https://www.financedigest.com/spains-inflation-to-be-lower-this-year-than-in-2022-minister.html "Spain’s inflation to be lower this year than in 2022 -minister").

But by December, with signs of inflation peaking, a recession looming, and [ECB Chief Economist Philip Lane raising the prospect of smaller rate](https://www.financedigest.com/stocks-euro-gain-amid-divergent-fed-ecb-rate-hike-outlooks.html "Stocks, euro gain amid divergent Fed, ECB rate hike outlooks") moves, investors had begun to doubt the ECB’s appetite to keep going for much longer.

It responded by committing at its Dec. 15 [meeting to several more rate](https://www.financedigest.com/the-recent-bank-of-england-meeting-the-biggest-rate-hike-recession-warning-and-the-fallout.html "The recent Bank of England meeting, the biggest rate hike, recession warning and the fallout") increases, although at 50 basis points apiece rather than the 75 bps in September and October.

Now, with [inflation falling and talk of smaller rate hikes by the Fed – which often influences other central banks due to the dollar’s](https://www.financedigest.com/stocks-and-gold-cheer-u-s-inflation-picture-while-dollar-slides.html "Stocks and gold cheer U.S. inflation picture, while dollar slides") status as the world’s reserve currency – investors are sceptical again.

[Money market](https://www.financedigest.com/explainer-why-european-money-market-funds-inflows-are-lagging-behind-the-u-s-torrent.html "Explainer-Why European money market funds inflows are lagging behind the U.S. torrent?") pricing has the ECB’s deposit rate peaking at 3.3% in July – a big drop from 3.5% foreseen at the turn of the year – with a cut by December.

Analysts said the [ECB had boxed itself in when Lagarde said last month it would raise rates by 50 bps at its “next meeting](https://www.financedigest.com/sterling-steadies-vs-dollar-ahead-of-boe-ecb-meetings.html "Sterling steadies vs dollar ahead of BoE, ECB meetings"), and possibly at the one after that, and possibly thereafter.

With the kind of commitment that she gave, you lose credibility if you don’t stick to it,” Dirk Schumacher, head of [European macro research](https://www.financedigest.com/european-businesses-are-advancing-their-digital-transformation-according-to-centurylink-study-conducted-by-451-research.html "European businesses are advancing their digital transformation, according to CenturyLink study conducted by 451 Research") at Natixis, said. That would be a problem for any [central bank.”](https://www.financedigest.com/no-santa-rally-for-markets-as-central-banks-dampen-peak-rate-hopes.html "No Santa rally for markets as central banks dampen peak rate hopes")

With the [euro zone](https://www.financedigest.com/euro-zone-inflation-seen-just-above-ecbs-target-in-2025-poll-shows.html "Euro zone inflation seen just above ECB’s target in 2025, poll shows") economy now faring better than expected, he argued Lagarde should ease away from that December pledge.

[TUG OF WAR](https://www.financedigest.com/analysis-arms-clients-turn-ipo-into-tug-of-war-for-chip-influence.html "Analysis-Arm’s clients turn IPO into tug of war for chip influence")

Lagarde’s commitment also puzzled ECB-watchers because the central [bank had previously said it wouldn’t make such public predictions](https://www.financedigest.com/2020-banking-predictions.html "2020 Banking Predictions") – known as forward guidance – anymore, but instead take each decision based on incoming data.

They’re facing the contradiction of saying they would go meeting-by-meeting while at the same time committing to several rate hikes,” said Frederik Ducrozet, head of macroeconomic research at Pictet [Wealth Management](https://www.financedigest.com/wealth-management-consultant.html "Wealth management consultant").

But Danske’s Christiansen said the ECB can’t always just [follow investors](https://www.financedigest.com/investors-re-inspired-by-world-leader-uk-following-pm-mays-brexit-speech.html "Investors re-inspired by “world leader” UK following PM May’s Brexit speech "), especially when situations are volatile.

[“ECB doesn’t have the luxury to change its view as often as markets](https://www.financedigest.com/how-will-the-ecb-contain-fragmentation-risk-in-euro-area-bond-markets.html "How will the ECB contain fragmentation risk in euro area bond markets?"). This of [course leads to a tug of war between the ECB and the markets](https://www.financedigest.com/dollar-rebounds-as-brainard-assures-markets-fed-will-stay-the-course.html "Dollar rebounds as Brainard assures markets Fed will stay the course") on the narrative,” he added.

Lagarde’s words in December represented a compromise to unify the ECB’s Governing Council, sources told Reuters [last month](https://www.financedigest.com/fintech-trends-to-look-out-for-during-the-last-six-months-of-2019.html "Fintech trends to look out for during the last six months of 2019"). Some members, like Lane, had sought the shift to smaller [rate hikes](https://www.financedigest.com/uk-economys-unexpected-bounce-spurs-more-boe-rate-hike-talk.html "UK economy’s unexpected bounce spurs more BoE rate hike talk") while others, such as Isabel Schnabel, wanted a bigger move.

Schnabel and Lane often air different views about policy in public and Lagarde, who is not an economist, has refrained from adjudicating between them, seeking instead to reflect the consensus view of the Governing Council.

In contrast, [investors know that a message from Fed](https://www.financedigest.com/oil-steadies-after-dipping-on-china-outlook-investors-await-fed-clues.html "Oil steadies after dipping on China outlook; investors await Fed clues") chair Jerome Powell can trump the opinions of other policymakers, the analysts said.

ING’s Brzeski said the ECB lacked a clear thought-leader on its Governing Council who could [steer markets](https://www.financedigest.com/marine-base-steering-gear-market-notable-developments-geographical-outlook.html "Marine Base Steering Gear Market: Notable Developments & Geographical Outlook") like Lagarde’s predecessor, Mario Draghi.

The cacophony of diverging voices and the lack of clarity on who is the leading voice [keeps hurting the ECB,”](https://www.financedigest.com/ecb-needs-to-keep-interest-rates-sustainably-high-to-combat-inflation-lagarde.html "ECB needs to keep interest rates ‘sustainably high’ to combat inflation – Lagarde") Brzeski said.

(Editing by Catherine Evans)


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