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SUMMARY

Benoit Coeure gave a speech presenting how communication is used as a tool of monetary policy by central banks. He first presented the theory behind forward guidance. Then he explained more specifically the case of the European Central Bank (ECB) and tried to assess the efficiency of the current non-standard monetary policies.

In a very uncertain environment, communication – and more specifically forward guidance – is the first way for the ECB to achieve one of its main goals: price stability. Asset prices are the first step of the monetary policy transmission chain. Limiting price volatility in the markets and leading markets’ expectations are crucial for the ECB to support the transmission of monetary policies. Getting closer to the lower bound also requires the Governing Council to be even more cautious about the way it communicates its decisions and the coming ones.
Benoit Coeure gave a tentative assessment of the efficiency of ECB’s forward guidance.

According to him, it has been quite efficient so far because:

• Market prices stabilized (even if forward rates remain more sensitive)
• The Euro-Area (EA) has been insulated from external shocks
• It supported well the international environment
• And it helped monetary policy accommodation by notably enhancing the impact of the assets purchases program (APP) through asset prices.

About negative rates and the current level of the deposit facility rate (DFR), he added that we remain far away from the physical and economic lower bounds. He emphasized the need for a disciplined communication because markets are not a homogenous entity and can sometimes internalize too many past negative shocks. Central banks have therefore to lead them.
During the discussion that followed the speech, Benoit Coeure and Guntram Wolff tackled several major issues. Benoit Coeure highlighted that as long as the inflation path will not be sustained, forward guidance on rates will remain necessary. He emphasized again the strong connection between volumes and rates as stable latter enhances the impact of APP by incentivizing financial institutions to trade money.

However, there is obviously a level of the DFR where the current policy will not be efficient anymore. The current deflationary environment also put into question the relevance and the role of the DFR. Neither a significant acceleration of demand for saves nor an increase of financial instability have been observed from the start of unconventional monetary policies until now and we can safely say that we remain far away from both lower bounds.
During the Q&A, it was first mentioned that the heterogeneity of the Governing Council is crucial and that we could go even further in terms of transparency by disclosing the votes. The use of dot plots, like at the Fed, is a trickier issue. Second, in a period of high uncertainty, the need for clarity about knowledge and honesty is even more important. The risk of not being clear enough is to add even more uncertainty. There is a duty to explain. Third, divergence in communication from the members of the Governing Council is not something that has to be addressed: the current level of information justifies the fact that there are different views within the Council.

Finally, improvements in inflation are noted to be not stable and mainly led by energy which re-enforces the necessity to keep ECB’s stance unchanged until sustainable positive developments will be observed.

Notes by , Research Assistant, Bruegel

Video and audio recording

On 31 March 2017 Benoît Coeuré was at Bruegel and spoke about Communication as a tool for monetary policy, specifically in a low-interest rate environment.

Full speech of Benoît Coeuré