ECB Insight: Panetta, Villeroy Plead for Less Rigid Communication, Others Less Eager

19 November 2024

By Marta Vilar – MADRID (Econostream) – The European Central Bank Governing Council’s hitherto ironclad commitment to purely data-dependent communication devoid of forward guidance is showing first cracks.

Banca d’Italia Governor Fabio Panetta and Banque de France Governor François Villeroy de Galhau have been the most outspoken about returning to a more ‘forward-looking’ approach, apparently leading the group agitating for change.

However, the current level of dissatisfaction is insufficient to pose a serious challenge to the status quo in which ECB President Christine Lagarde – national central bank governors are much more flexible - drops only the slightest of hints about the future course of monetary policy.

In recent conversations with Econostream, only a couple of policymakers followed the example of Panetta and Villeroy and started calling - less enthusiastically - for less straitjacketed messaging.

The others Econostream spoke to warned of the perils of returning to anything like the explicit forward guidance that characterised the ECB’s monetary policy until the beginning of the hiking cycle in 2022, when this tool was pronounced dead and gone.

On October 23, Panetta opened the can of worms. ‘We should return to a normal type of communication’, he said in an appearance at the IMF. But it was not until today that Panetta mounted a more serious assault.

In a detailed speech suggesting the ECB should remove the wording about its restrictiveness from the statement and openly questioning the meeting-by-meeting, data-dependent approach, Panetta also made a plea to abandon the ‘no guidance’ principle.

‘We deliberately chose to maximise our freedom in the eye of the storm, choosing the [no guidance] option – but the situation has changed, and it is now time for the ECB to give more explicit indications of its intentions’, he said.

For Panetta, the ideal solution is a ‘directional guidance’ that could support consumption and investment, thus minimising the risk of weak demand.

‘It would help households and firms to take more informed longer-term decisions', he elaborated. 'After all, the purchase of durable or capital goods is a form of commitment. If the central bank is not prepared to abandon the ‘no-guidance’ approach, it becomes more difficult for households and firms to make commitments.'

Even policymakers who supported a less rigid communication strategy in conversations with Econostream fell decidely short of endoring Panetta’s more radical proposals.

Being data-dependent and shunning forward guidance was still consistent with giving hints about what would happen ahead, said one Governing Council member who rejected using very precise language about coming moves.

Another of his colleagues agreed that forward guidance was best avoided, but argued that the ECB could give signals to the market, i.e. by conditioning a specific policy move to a certain outcome of the data.

Villeroy seems to be thinking more along the lines of Panetta. In a recent speech at NYU in New York, he said that ‘now that we are back to a “normal” inflation regime, our reaction function should become more “forward-looking”, with greater confidence on forecasts, and rely less on monthly flash data.’

For Villeroy, this change in the ECB’s communication approach should look like what’s known as “soft signalling”, a strategy that is all about making ‘clearer’ the central bank’s reaction function.

‘Contrary to forward guidance, it is not a commitment to deviate from the standard reaction, but it can still influence market expectations of future policy’, he said.

Villeroy and Panetta with their more explicit appeals and these insiders with their vague desire for a slight change in communication are all outnumbered by their peers demanding business as usual.

One Governing Council member said that data-dependence had worked ‘quite well’ and the ECB should stick with it, leaving no doubt about his opposition to any modification of the current communication strategy.

Maintaing the meeting-by-meeting approach was also supported by another insider, who was wary of returning to forward guidance, lest subsequent developments leave the ECB regretting it.

A further Governing Council member said he did not believe there was an alternative to the current communication strategy. Reacting specifically to Panetta’s call on October 23 for more guidance, this policymaker stated that the ECB was already giving guidance, such as a clear indication of the direction of interest rates.

The further the ECB gets into the easing cycle, the more self-evident the need to modify communication will become. Convincing the Council that the time is now, meaning December's meeting, could be a harder nut to crack.

Beyond short-term adaptation to changing circumstances, probably all one can rule out is a return to explicit forward guidance, which even the staunchest supporters of a change in communication firmly reject.