The European Central Bank must be critical of market expectations for its future policy moves, basing its decision on economic data rather than financial market prices, ECB vice-president Luis de Guindos said on Tuesday.
The ECB has all but promised a stimulus package for its Sept. 12 policy meeting and market expectations have been growing. Investors are already pricing in several rate cuts for the coming year and a fresh round of bond purchases, commonly known as quantitative easing.
“Our monetary policy is data-dependent, not market- dependent: indications from market expectations cannot replace our policy judgement,” de Guindos told a conference in Manchester.
“Another way of robustifying our analysis is to look for expectations beyond those expressed in financial market prices,” he added.
With a global trade war dragging euro zone manufacturing into recession, the bloc’s economy is barely growing. Recent indicators appear to suggest that the domestic economy is slowly being weighed down by imported troubles. Jobs growth is slowing, retail sales have lagged and confidence indicators are slipping.
But de Guindos appeared keen to soothe heightened expectations, noting the risk of the ‘echo chamber effect’, when its strong signals start to get reflected in asset prices and markets no longer respond to news about the economy, as they are cemented by central bank communication.
“The echo chamber effect and the inherent noisiness of market signals are reasons why we need to take the expectations that are priced in financial markets with a pinch of salt,” de Guindos said.
“The more forward guidance we give, the less informative are market signals for gauging the state and the expected evolution of the economy,” he said.
The ECB has a solid record in guiding market expectations, but its stimulus measure have exceeded expectations at key points in the past, earning the bank a reputation for being able to surprise.