The role of ECB communication in guiding markets

Economists and central bankers nowadays believe that forward guidance has become more important in a world in which key interest rates have hit their effective lower bounds (ELB). In the case of the European Central Bank (ECB), forward guidance should have increased the informational content of the introductory statements at the press conferences following ECB policy meetings. We examine whether such ECB communication adds information to a shadow interest rate that summarizes the overall policy stance as interpreted by financial markets. To measure communication, we use information based on ECB press releases distinguishing between topics like inflation, the real economy and monetary developments. We also look at the effect of communication on consensus expectations about key macroeconomic variables. The ECB's assessment of the economy, i.e., communication related to economic growth, triggers movements in financial markets and thereby the shadow rate. Communication of the ECB through its press releases also causes professional forecasters to change their outlooks. Not only are their growth forecasts affected, but so are their expectations for M3 growth and inflation.