2023-07-09 12:19:31
“Expectation management” is one of the tasks of monetary policy. At the moment the European Central Bank (ECB) is obviously very concerned with how it can manage to smash possible expectations of falling interest rates on the financial markets in the foreseeable future. The reason: If the financial markets expect interest rates to fall again soon, this will already affect the fight against inflation. One circumstance could be treacherous: the more the members of the ECB Governing Council make it clear to the financial markets that the central bank intends to raise interest rates further in July and possibly also in September, the more speculation could arise on the financial markets that this will change may turn out to be too much in hindsight – and more future rate cuts could be priced in.
The economist Erik Nielsen from the Italian bank Unicredit even goes so far as to think that the ECB should prefer not to raise interest rates in September in order to dampen expectations that interest rate cuts will have to be made in the future. The markets are already pricing in a rate cut next year.
“My guess is that if the ECB hikes rates to 4% in September amid soaring inflation and increasingly weak growth indicators, it will have little chance of convincing markets that it will stay that way through 2024,” says the economist. Nielsen argues, so to speak, that by refraining from further tightening of monetary policy in the short term, the central bank could achieve a tightening effect in the longer term – a remarkable paradox, even if many other ECB observers do not share this assessment, at least not as a consequence.
In any case, at the moment, formulations that the high key interest rates must be left up there for a longer period of time are an integral part of the speeches by the ECB Governing Council members. Bundesbank President Joachim Nagel put it this way in a speech at the Dekra auditing company: “Interest rates will probably have to remain at a higher level for longer.” The Bundesbank President then repeated the message for the Dekra members in car language: “As soon as we Once the car has braked properly, we should keep our feet steady.”
Similarly, ECB President Christine Lagarde said: “We have to bring interest rates to a sufficiently restrictive level and keep them there for as long as necessary.” Conversely, Italian ECB Council representative Ignazio Visco argued: Interest rates are already ” restrictive area” – one should now talk about the period of time they would have to stay there. And the head of the French central bank, François Villeroy de Galhau, who is said to be not too far removed from the later ECB compromise line, had recently emphasized that in his view “the duration” of the restrictive interest rate level was in any case more important than “the amount”. .
A comment by Inken Schönauer Published/Updated: , Recommendations: 13 Christian Siedenbiedel Published/Updated: , Recommendations: 4 Markus Frühauf Published/Updated: , Recommendations: 24
On the other hand, things have calmed down around specific calls for interest rate hikes in September – possibly even partly because of similar tactical considerations for expectation management with regard to later interest rate cuts, as formulated by economist Nielsen. “The ECB does not like it when expectations of falling interest rates lead to a lower yield curve,” said economist Karsten Junius of Bank J. Safra Sarasin. “If the future expected interest rates are priced in lower by the market, this is already having an expansive effect on the economy.”
In particular, the interest rates at the middle and long end of the yield curve, which shows how high the interest rates are for shorter and longer maturities, would also fall with the expectation of falling key interest rates. These, in turn, are important for mortgage lending in particular: if the markets price in interest rate cuts in the future, this can already cause long-term building interest rates to fall. Fluctuations have always been observed recently.
“If long-term interest rates are falling, the ECB would have to increase key interest rates at the short end of the yield curve to achieve the same degree of monetary tightening,” says economist Junius: “In other words, the more medium- to longer-term interest rates affect the economy and the Curb inflation, the less the ECB would need to raise interest rates and the less volatile its monetary policy would be.”
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