MNI SOURCES: Unease At ECB Over Comms, Response To Yield Surge

The European Central Bank's decision to consult its Governing Council before announcing an increase in the pace of its bond-buying surprised some Council members, with current and former Eurosystem officials also expressing concern to MNI about the ECB's communications with markets during a bout of volatility.

The ECB has until now had responsibility for day-to-day management of its asset purchases, within parameters set every three months by the Governing Council. The move by the Executive Board to consult the Council during its March 11 meeting set a precedent for the operation of the Pandemic Emergency Purchase Programme, whose maximum envelope of EUR1.85 trillion is available for purchases until March 2022, several sources said.

Broad agreement was reached despite significant differences between members over the size of the pickup in the pace of bond-buying, several sources said. The final decision was taken with "something very, very close to unanimity," one official recalled.

"I have no problem with the decision on monthly bond buys coming back to the Governing Council," a current central bank official said, "although I was surprised. If it was meant to signal intent to the financial markets, I'm not sure quick and decisive action at an earliest possible opportunity wouldn't have been better."

AMBIGUITY

Former officials who spoke to MNI were more sharply critical.

"Markets thought they had flexibility to use more or less the whole envelope," one said. "Now the [Executive Board] is saying that using more or less is a monetary policy decision and we can't do that alone, we want to have a Governing Council decision. They should have done that by telephone - just calling a few or all the national central bank governors. Now they wait until there is a Governing Council and on a quarterly basis – it's ridiculous."

The ambiguity regarding the extent of the increase in the ECB's purchases, only described as set to be "significantly higher", also presents problems, the former official said.

"I think the markets have understood that all this reflects big differences within the Governing Council," the source said. "The consensual approach of Lagarde has shown its limits.

A former national central bank official agreed.

"Benoit [Coeure] would have never accepted a sort of operational ex-ante control by the Governing Council," the source said, referring to the Executive Board member responsible for market operations until 2019. "There was always a defined assessment of operational activities, of course, based on general decisions by the Governing Council, but this was always done ex-post only."

All sources who spoke to MNI were critical of the ECB's communications with markets, with the former ECB official arguing that it was a mistake to state explicitly in December that the whole EUR1.85 trillion envelope might not be used during the PEPP's life. This made it harder for the ECB to argue that this year's surge in yields, driven by an improving U.S. economy, reflected very different dynamics to those seen in Europe, the source said, adding "they really messed this up."

CONSENSUAL APPROACH

A currently serving official was more generous when referring to the ECB's March meeting.

The Governing Council "could have been clearer," the official admitted. "The main message is agreed by the Governing Council, and that was reflected accurately, if not fluently."

While Lagarde's consensual management has avoided bust-ups between more hawkish and more dovish officials, a significant test looms as the ECB's monetary policy review is due to be concluded by around September.

The review is not expected to provide a comprehensive guide to the ECB's future policy options, but some officials say it could more clearly define the "symmetrical" nature of an inflation target, which could also be reset to "2%", instead of "below, but close to, 2%".

A more difficult debate will focus on whether to extend the flexible rules governing the PEPP to the ECB's more permanent bond-buying facilities, sources told MNI, with one current official noting that the decision to leave open the possibility of not using all of the PEPP's EUR1.85 trillion envelope may have avoided an unnecessary early confrontation between hawks and doves.

"If you're in a strategy review process, also with a lot of other topics in the pipeline, it's not bad to have at least some harmony within the Council," the official said.

Another official stressed that the outcome of the review could be in place for a dozen years or more.

"We cannot think only of today, but the tomorrows as well."

THIRD WAVE

Considerations over the ECB's future policy framework come as the eurozone economy faces another wave of Covid, and as the delivery of the EU's emergency pandemic funds still requires ratification by national parliaments.

"Q2 will be worse than expected," one official said. "But although slow, the vaccine programme is underway and is rolling out. The pick-up will start in the back end of Q2 and run into H2.'

The former senior official, though, was exasperated by Europe's slow emergence from the pandemic.

"Each additional month you wait is more proportionally costly – a six-month interruption is okay, but if it's double it's much worse, it's not just doubling, proportionally it is far worse."

An ECB spokesperson declined to comment on the matters in this article.