ECB Forward Guidance Is No Longer Working as It Used to
If ECB had fully bought-in to transitory inflation narrative, it would respond to a hit to income by loosening monetary policy.
(Bloomberg) -- Bloomberg Economics’ model shows that if the European Central Bank had fully bought-in to the transitory inflation narrative, it would respond to a hit to income by loosening monetary policy, guiding markets to a later lift off for interest rates and lowering risk-free lending rates at longer maturities. Instead, what we see is that markets have brought forward expectations for rate hikes and the whole yield curve has shifted upward -- a climb that in part probably reflects the reduction of virus-related tail risks as the year progressed and the global economy improved. But the shift may also flag a deeper challenge that central banks face: forward guidance may no longer be working as it used to.
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