Working Paper Series no. 859: ECB Communication and its Impact on Financial Markets

Using an extensive dataset on public speaking events by ECB and euro area National Central Bank (NCB) officials, we show that communication outside of ECB regular monetary policy meeting days has a significant effect on daily movements in Eonia rates, market-based inflation expectations and sovereign bond rates. The remarks of ECB presidents are most important and market reactions to them are comparable in size to those on ECB meeting days. In addition, ECB presidents’ remarks given ahead of meetings with policy changes have a significant effect on Eonia rates of the same sign as the subsequent policy decision. Our results suggest that communication outside of regular meeting days contain a monetary policy signal and, thus, highlight the importance of this communication when studying the effects of monetary policy.

We examine the importance of various dimensions of the ECB's and the Eurosystem's communication for financial markets. In particular, we consider the communication outside of monetary policy meeting days (CoMPDs), comprised of the speaking events of (i) ECB presidents, (ii) other members of the ECB Executive Board (EB), (iii) ECB Governing Council members representing the French, German, Italian and Spanish national central banks (NCBs), and (iv) European Parliament hearings of the ECB president. We also discuss how market movements in reaction to CoMPDs compare to movements on regular monetary policy meeting days.

To this aim, we construct a Euro Area Communication Event-Study Database (EA-CED) containing daily and intra-day changes of several financial variables around different ECB/Eurosystem communication events. This database provides many opportunities to investigate the effect of central bank communication (including policy actions) on financial markets.

We first document that there are frequent ECB/Eurosystem communication events outside of regular ECB monetary policy meeting days. In particular, we observe that CoMPDs increased during the financial crisis of 2007-2008, peaking in 2013, the year the ECB introduced forward guidance on interest rates. Interestingly, the ECB president has delivered fewer speeches since the financial crisis while the number of speaking events of other Governing Council members have increased over the years.

Second, using an event study approach on daily data, we document that CoMPDs are associated with significant movements on Eonia rates, country-specific sovereign bond yields, and market-based inflation expectations at different maturities. With respect to the type of speaker, we find that speaking events of the ECB president have the strongest effect on daily movements. However, we also find that there is a difference between the effect of CoMPDs before and after the global financial crisis. In the pre-crisis period, it is mostly the communication of NCB governors and other ECB EB members that moves markets. In the post-crisis period, it is mostly the ECB president's communication.

In addition, we focus on speaking events taking place in the few weeks before ECB meetings with monetary policy changes for easing or tightening. We find that Eonia rates at short maturities decrease on days with ECB presidents’ speeches given ahead of meetings with easing decisions. In contrast, medium to long-term Eonia rates increase ahead of tightening decisions. Bloomberg news coverage of these speaking events corroborates our finding, revealing that some of the remarks given during these events contain a clear signal about the upcoming policy move. Finally, an intra-day analysis of CoMPDs events shows evidence of systematic movements in the Eonia yield curve using short windows of time around speeches of ECB presidents, in line with the daily regression analysis.

Overall, our results confirm the importance of central bank communication for market movements and highlight the importance of communication outside of meeting days for understanding the transmission of monetary policy. This suggests that analyses that look only at announcements during monetary policy meetings to identify monetary policy shocks or surprises should be extended to incorporate policy signals that come from the communication of ECB officials outside of regular meeting days. 

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Working Paper Series no. 859: ECB Communication and its Impact on Financial Markets
  • Published on 01/14/2022
  • 32 pages
  • FR
  • PDF (691 KB)
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Updated on: 01/14/2022 15:23