ECB signals end to interest rate 'codes'

The European Central Bank will overhaul its communication strategy and stop using "code words" to signal interest rate changes when the current tightening cycle ends, according to a leading member of its governing council.

Axel Weber, Germany's Bundesbank president, indicated in an interview that the ECB would drop the use of phrases such as "strong vigilance" - used to indicate that borrowing costs would rise in one month - and hinted that he had become frustrated at their use.

Central bank communication policy is the subject of worldwide debate. However, Mr Weber made it clear that the ECB would not follow the US Federal Reserve and the Bank of England in releasing minutes of its interest rate-setting meetings. The ECB should instead emphasise "medium-term" guidance on how it might react in different economic circumstances.

"One could actually say that publishing minutes is old-fashioned because it is not real-time transparency, as the point of time when you take a decision." Once a parliament or government has taken a decision, "it is publicly announced and justified. I'm quite pleased that we don't rely on delayed minutes but communicate in real time."

Publishing minutes had "adverse effects" because they moved financial markets weeks after the actual event, the Bundesbank president said. "This is undesirable. It should be avoided."

The ECB believes its communication strategy, which includes an hour-long press conference immediately after its monthly interest rate-setting governing council meetings, has increased its predictability and thus enhanced the effectiveness of monetary policy. The press conference starts with an extensive statement by Jean-Claude Trichet, ECB president, setting out the council's latest thinking.

But in the latest interest rate-tightening phase, which started in December 2005, attention focused increasingly on just one or two phrases that, in effect, became a traffic light system for signalling a rate rise. Two months ahead of an increase Mr Trichet would announce that the ECB would "monitor very carefully" inflation risks, switching to "strong vigilance" a month later.

Mr Trichet has made clear that "monitor very carefully" should no longer be read as meaning an increase two months away.

Mr Weber's comments will heighten speculation that "strong vigilance" will be abandoned as well.

While Mr Weber admitted that the use of "key words" might help in a "normalisation" phase - bringing interest rates up to a level in line with the pace of economic growth - "towards the end of such a period it will become more difficult to use them and therefore I think that those words will at some point naturally disappear from statements".

The ECB had signalled "that now the degree of data dependence has increased in our monthly judgment of all incoming information".

Mr Weber is considered among the more hawkish members of the ECB's governing council but one of the most intellectually rigorous. - ( Financial Times Service)