ECB Insight: ‘Some Time After’ Without Hidden Meaning, Econostream Understands

21 March 2022

By David Barwick – FRANKFURT (Econostream) – There was no secret motive behind the recent change in wording of the European Central Bank’s forward guidance, Econostream understands.

As had been widely speculated in the run-up to last week’s monetary policy meeting, the Governing Council decided to remove the words ‘shortly before’ from the sentence on the relative timing of an end to net asset purchase programme (APP) purchases and rates lift-off.

Forward guidance now states that ‘[a]ny adjustments to the key ECB interest rates will take place some time after the end of our net purchases under the APP…’

Speaking at the subsequent press conference, ECB President Christine Lagarde said that the new wording was ‘all-encompassing’. ‘It can be the week after, but it can be months later’, she said.

‘There was no hidden intention there and we don’t attach any secret meaning to it that we haven’t shared’, an insider told Econostream. ‘We could have also said “at some point after” or anything else that would be indeterminate with respect to time, as long as the sequencing is respected.’

The change in wording preserved the ECB’s established sequencing while otherwise adding maximum degrees of freedom to the execution of policy normalisation, another insider said. This was very appropriate in view of the extreme uncertainty under which the ECB was now operating, he said.

The previous phrasing of ‘shortly before’ implied an undesirable automatism about the one step with respect to the other, another person argued. That posed a risk in that the variables that should govern a possible decision to hike might not have been understood to be driving the decision, with the role instead usurped by the time variable.

The ECB had in effect untied its hands with the switch to ‘some time after’, yet another person commented.

Despite the emphasis on ‘flexibility’ and ‘optionality’, it is evident that the change in wording is also about the key ECB principle of ‘gradualism’, making it reassuring to Council doves, given that it counters the increased market speculation in recent weeks, fed by more hawkish members of the Council, about an earlier-than-anticipated rates lift-off.

But then, the decision of March 10 already makes this clear, inasmuch as the relevant sentence about any rate hikes ends with the words ‘and will be gradual’.

Lagarde made the connection to gradualism explicit again when she explained in a speech last Thursday that the new phrasing was ‘to temper expectations of any abrupt or automatic moves.’

‘Of course, depending on your personal feeling about the need to adjust interest rates, you might want “some time” to be a shorter or longer period than someone else’, one insider acknowledged. ‘But in the end, it is going to depend on the data and I think we all know that and the markets understand this as well.’