Orphanides Tops Taylor Rule as ECB Rate Guide, Commerzbank Says
(Bloomberg) -- A formula developed by Athanasios Orphanides is better at describing the European Central Bank’s monetary policy than the famous Taylor Rule and indicates the institution is likely to keep its loose stance for longer than previously anticipated.
That’s the view of Commerzbank economist Michael Schubert, who writes that the former ECB Governing Council member’s theorem is superior to that of Stanford Professor John Taylor because it avoids variables such as the output gap that are subject to “considerable uncertainty.”
The ECB has committed to keeping interest rates at their current record lows at least through the end of the summer, implying the possibility of a hike later this year. But according to Schubert’s analysis -- based on a working paper by Philipp Hartmann and Frank Smets -- it won’t proceed with its gradual unwinding of policy and won’t raise rates in 2019.
Instead, officials in Frankfurt are likely to offer new long-term tender operations, possibly with a maturity of three years. The announcement could come as early as next month, when Commerzbank expects the ECB to cut its forecasts for growth and core inflation.
The Taylor Rule has been widely used by policy makers as a guide for setting interest rates since it was introduced in the early 1990s as a predictor for the U.S. Federal Reserve. The ECB’s main refinancing rate is at zero, though by Taylor’s measure, it should be higher.
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