Dhe European Central Bank tried on Friday via the short message service Twitter to clarify the message on the prospects for monetary policy presented by President Christine Lagarde at the press conference on Thursday. The statements made by Lagarde at the press conference, which some experts considered unclear and also contradictory, left the financial markets with the impression that the ECB would only proceed hesitantly with interest rate hikes from April onwards. As a result, stock and bond prices rose and the euro depreciated against the dollar on the foreign exchange market.
On Friday, the ECB presented the excerpt from the press conference in which Lagarde clearly committed himself to a monetary policy that would remain restrictive even after April, if necessary, and that would accept any associated negative effects on the economy. The mood on the financial markets then turned around again: bond and share prices fell and the euro appreciated a little against the dollar on the foreign exchange market.
Examine connections in more detail
Regardless of whether the ECB should be concerned about its communications, this episode touches on a broader issue: how sensitive is the economy today to changes in short-term interest rates? Interesting thoughts on this were heard at the World Economic Forum in Davos. On the one hand, the thesis was put forward that in economies with a growing importance of services and intangible investments (patents, software, further training of personnel), the private sector should react less strongly to interest rate changes.
The situation is different for the state: Since central banks have withdrawn large holdings of long-dated bonds from the market and thus neutralized them from the point of view of the state, the average maturity of the bonds held by the market has fallen. However, this increases the importance of short-term key interest rates for the interest burden on national budgets. It would be nice if these connections were examined more closely.