Take a Second to Read Draghi’s Minutes Is Lesson From Fed
Mario Draghi just handed investors a new way to make money.
Catching up with major international counterparts, the European Central Bank president yesterday announced his institution will start issuing minutes of policy meetings from January as part of an overhaul that will reduce how often its Governing Council sets interest rates.
Such publications give greater insight into the thinking of monetary authorities and make them more predictable, according to studies from central banks such as the U.S. Federal Reserve. In the ECB’s case, accounts of proceedings might leave investors less prone to being surprised by its actions while offering a new trading opportunity on the days when they are released.
Minutes “enable central banks to better convey how they are analyzing economies and so the markets are better informed,” said Julian Callow, founder of London-based Catalyst Economics Ltd.
This week’s pledge on minutes, which has been debated internally since at least 2012, marks the latest embrace of transparency by the euro area’s central bank as monetary officials try to support weak economies and avoid spikes in market borrowing costs by better guiding investors.
The ECB previously vowed to keep minutes out of the public eye for 30 years for fear they would open officials to criticism in their home countries, of which the euro-area currently has 18. Former chief economist Otmar Issing told centralbanking.com last year that enough information was already provided and detailed minutes would be “absurd” by risking “an endless debate, which is very risky for the reputation and for the European approach.”
“There is a lot of fear of the ECB being a special animal, with doubts about the identification of governors and so on, but I think that is overstated,” said Anatoli Annenkov, an economist at Societe Generale SA in London. “It will provide further nuance and detail on what kind of focus there was during the meeting.”
Draghi said yesterday that the Governing Council will now set monetary policy every six weeks rather than monthly, in part to quell market speculation ahead of each gathering. That echoes the timetable of the Fed, which has eight scheduled meetings a year and publishes an account three weeks later.
“The issue is whether we should actually have, each and every month, the expectation for action,” said Draghi, noting the new agenda better enables the accounts of the meetings to be prepared and approved. What the minutes will look like is still being discussed.
Investors may nevertheless be buoyed by the decision given the track record of minutes elsewhere.
They “could provide precious insights into the debates on the Governing Council,” said Elga Bartsch, chief European economist at Morgan Stanley in London.
The release of the Fed’s minutes last year had an average effect of 2.1 basis points on the 10-year Treasury yield, according to a March analysis by St. Louis-based Macroeconomic Advisers LLC. A study published in September by Carlo Rosa of the Fed Bank of New York found that volatility of two-year Treasury yields is roughly three times larger on days when the Fed posts such publications.
The appeal of minutes lies in providing more insight into what policy makers are thinking about the economy and what indicators they’re monitoring. A 2012 study of the Swedish Riksbank’s minutes by economists Mikael Apel and Marianna Blix Grimaldi found they made it easier for investors to predict future policy decisions in Sweden.
The same stands for the Bank of England, whose economists Rachel Reeves and Michael Sawicki wrote in 2005 that the U.K. central bank’s minutes “have a marked impact on short-run interest-rate expectations.” The BOE releases its account of proceedings 13 days after its Monetary Policy Committee meets.
Failure to publish minutes has opened the ECB to criticism for a lack of transparency. A Barclays Plc (BARC) survey of 844 clients in April 2013 gave the central bank a score of 5.7 out of ten for its communications, compared with 7.1 for the Fed. Fifty nine percent of respondents considered minutes essential, up from 34 percent in 2008.
Having led the way in transparency by holding monthly press conferences since its inception, the ECB has slipped behind its counterparts following the financial crisis as a desire to keep investors informed led others to hold their own media briefings and releasing more detailed economic forecasts.
The minutes announcement follows Draghi’s decision a year ago to start committing to keep interest rates low for an “extended period.” He repeated such so-called forward guidance yesterday by saying the ECB borrowing costs “will remain at present levels for an extended period of time.”
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