ECB must become more transparent

The transparency of the European Central Bank leaves something to be desired. The ways in which the ECB makes its policy decisions and determines interest rates are shrouded in mystery. This has led to unnecessary uncertainty and other unwanted effects on the financial markets.

This is argued by Sylvester Eijffinger, Professor of Financial Economics at Tilburg University, in a Briefing Paper which he presented to ECB president Mario Draghi on March 3. Eijffinger was commissioned by the European Parliament to evaluate the ECB’s transparency over the past decade.

Where political and economic openness are concerned – the extent to which the political preferences of the policy makers and the economic data they use to guide their policy are clear – the ECB has historically scored well. However, as regards procedural disclosure, it performs worse than most central banks.

For instance, minutes and voting records are kept secret. The ECB has argued that more disclosure would make the voting members open to undue influence: feeling the eyes of the world upon them might induce them to let national considerations take precedence over their financial acumen.

Eijffinger argues, however, that the financial markets want insight into decision-making processes. “How do members assess and weigh the risks? What happens now is that, after every decision, the media are guessing how the votes went. As a result, it is difficult for the financial markets to make decisions and the overall effect is uncertainty.”

Banks should give greater clarity on the interest rates that they plan to apply, according to Eijffinger. In contrast to most central banks, the ECB fails to communicate clearly on this subject.

“The ECB only communicates to the outside world on short maturities (i.e., the money market interest rate), not on long maturities (i.e., the capital market interest rate). The latter is dependent on the inflation rate, which is not under the ECB’s control. But the financial markets want to know what rate of inflation will be acceptable to the ECB in the coming years. As long as the ECB fails to be clear about this, its ‘forward guidance’ (i.e., influencing market expectations by means of forecasts) rings hollow. They really need to communicate more effectively in this context.”


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