ECB Communication and its Impact on Financial Markets

We examine the importance of various dimensions of the ECB's and the Eurosystem's communication for financial markets. To this aim, we construct a Euro Area Communication Event-Study Database (EA-CED) which combines 304 ECB Governing Council meetings and approximately 4,400 inter-meeting communication (IMC) events from Governing Council members with the intraday changes of 47 euro area financial variables around these events, from January 1999 to February 2024. 

The IMC events in the EA-CED are public remarks in the form of speeches and interviews given by i) ECB presidents, (ii) the other five members of the ECB Executive Board (EB), (iii) the Governors of the French, German, Italian, and Spanish national central banks (NCBs), as well as the European Parliament hearings of the ECB president and the publication of the ECB Monetary Policy Accounts. The EA-CED dataset allows for analyzing the impact of communication on financial markets and on the macroeconomy. We make this database publicly available.

We document that Eurosystem inter-meeting communication has a considerable impact on euro area financial assets, often of similar or larger magnitude than ECB policy announcements, particularly for medium- and long-term interest rates. The share of ECB GC meetings significantly affecting the risk-free interest rates declines as their maturity increases. The opposite holds for the IMC events, which have stronger effects as the maturity of the assets increases. We also find evidence of time variation in these patterns. IMC events are associated with peak effects predominantly in years with rate hiking cycles. Importantly, communication from other Governing Council members than the ECB president also plays a significant role.

We also examine why markets react around IMC events, in order to assess the information content of this communication in comparison to the ECB GC policy announcements. We show that IMC events ahead of monetary policy decisions contain important policy signals as they move risk-free rates or specific sovereign yields in the direction of the forthcoming decision. Examining how risk-free interest rates and sovereign yields move jointly in response to central bank communication, we find that news in IMC events, similar to ECB GC policy announcements, is multidimensional and relates mostly to news about the path of policy and the state of the economy.

Overall, our research highlights the crucial role of central bank communication in influencing market movements. It also underscores the importance of considering communication outside of regular meeting days to fully understand the transmission of monetary policy. This means that analyses of the effects of monetary policy should not just focus on policy announcements during official meetings but also include the policy signals conveyed by ECB officials between these meetings. 

Keywords: Monetary Policy, ECB, Communication, Financial Markets, Euro Area
JEL classification: E03, E50, E61