Financial Markets and the European Central Bank

Financial Markets and the European Central Bank

Introduction

The paper aims at analyzing the financial markets and the European Central Bank due to the recent credit crunch and recession in many economies that lead to the global financial crisis in both developed and developing countries. During a meeting with the council in 2006, most financial participants were not expecting any change in the European Central Bank rate. The announcement that came later suggested that there was to be no change in interest rates, thus making no change in the money interest rate in the market. The financial crises led accusations to the Central Bank and financial markets regulators, indicating that they were failing in their duty of protecting the depositors. The depositor’s made a comparison of the bank operation in the 1930s and recently, which shows that there was interest rates declination in a more significant margin never witnessed historically. The crisis also led to a decline in employment, economic growth while financial institutions run bankrupt, and others get nationalized as a means of rescue.

The crisis acts as an indicator that monetary policies are crucial from the market participants since it helps in planning about future strategy. The crisis also led the European Central Bank to come up with new regulatory measures on the financial system since the problem had extended its roots to Greece and the Italian Banking system while most European Union counties faced national debt. Some countries, especially from the developed countries, had to formulate ways to deal with the unprecedented levels of their country’s public debt and budget. The crisis is leading to a possibility of Italy banks will end up sparking crisis in the Eurozone and Brexit effects.

The study aims at complementing existing evidence on the financial market effect of the European Central Bank’s monetary policies on how they affect decisions and communication. European Central Bank market data will help in constructing a context-based analysis using the European Central Bank statements. The main reason why the study focuses on European Central is that it is the most successful and independent multinational bank in the world. It is also the only central bank that summons the dominance of the Federal Reserve in the old world financial order. European Central Bank is also the most crucial foreign bank to the United Kingdom and Bank of England due to its ability to coordinate the European Central Bank’s regulations despite its exclusion in the Euro-Zone. Lastly, the paper will analyze its formation and development as its significant role in integrating the economy and the success of the European Union as well as the pressure it faces due to threats from the sovereign debt crisis in the Euro-Zone.

The paper will use both qualitative and qualitative analysis where the qualitative analysis will help in analyzing public statements and positions that Jean Claude, the president of the European Central Bank, as he speaks on behalf of the central bank council. Quantitative analysis will use data to compare the empirical data that qualitative will gather. Quantitative analysis will reflect on the interest rate rules in both pieces of literature and the new estimate findings.

Qualitative Analysis on Public Statement and Position of ECB

The section aims at unveiling different variables that determine monetary policy in the Eurozone.

Inflation and inflationary expectations

Rational monetary policy choices in Eurozone depend more on inflation and inflationary expectations of private agents (Vranceanu &Fourcans, 2007).  Policymakers, in most cases, can draw distinctions on whether the rise will be long-term or short-term inflation where long term is the crucial objective making short-term evaluation a supportive evaluation. The speech made by European Central Bank president, Mr. Trichet, is that increase is a monetary phenomenon that depends on other financial developments (McBride, Chatzky, & Alessi, 2019).

Monetary developments

Mr. Trichet insisted on the term fiscal analysis, which points to increase the upside risks to price stability in comparison to the short and long term. The dominant factor that the European Central Bank uses in explaining the acceleration in the debt crisis is the reduced levels of interest rates. The low level of interest rate stimulates the high monetary expansion trend rates.

Interest rates rules and the ECB: an evaluation of previous empirical estimates

The section will analyze the quantitative estimates at determining to what extent quantitative verifies the qualitative analysis of the European Central Bank’s main goal being able to judge the monetary process and the financial authorities. Most empirical studies outcome shows that verbal commitment to reference value since the bank seems to pay little attention to such indicators thus out ruling the variable since it is not significant in its estimates (McBride, Chatzky, & Alessi, 2019).

New estimates on Interest Rates for ECB’s

The section will evaluate original views that surround the European Central Bank interest rate rules. The dependent valuable is pertinent in estimating the short-term goal. In the case of interest rates, the bank seems to focus more on future inflation deviations, thus having more consistency in price stability goals. What happens when more focus s put in measuring industrial output deviation. Through its long term goals, the European Central Bank is expected to raise the interest rate by one point in the case in case the forecast exceeds the objective by a quarter-point. Hence, the response is much stronger when real activity estimates by deviation in the industrial output growth rate.

Inflation  and the price stability objective

Euro’s inflation rate has been the objective since its birth in 1999 (McBride, Chatzky, & Alessi, 2019). Hence, European Central Bank is expected to follow a policy that will help that will reduce the inflation rate that is in line with the objectives or somewhat change goals to those that will lower the inflation rate.  The new target will be as a result of the original one failing to address the inflation rate adequately where the bank will be persistent and consistent and not the usual periodical objectives. The European Central Bank seems more concerned with the economic outlook, thus forgetting that real activities such as unemployment can affect the bank significantly. Hence, the bank should be vigilant in ensuring that they defend their credibility by making sure that impact their policy to curb inflation is credible. The fact is that, if inflation objective is traded to support real activity, then credibility will be compromised. The bank should ensure that it focuses more on the inflation objective and the monetary developments than on the short term fluctuation presented in the real economy.

Conclusion

The paper dispenses an analysis of European Central Bank monetary policy from both qualitative and quantitative point of view. From the reviews, there are some commendations on the system. Through a quantitative approach, form on information, the quoted speeches from the European Central Bank, Mr. Jean Claude. Through his speech, various variables are taken to determine the monetary policy in the Euro area using qualitative analysis. The things stressed in the qualitative analysis the desire to reinforce and establish the monetary policy using its credibility to control inflation and sustain Eurozone growth. Despite the bank seeming to defend that they are into the task of preventing further increase, the inflation rate has always been the objective for the longest time. The deviation is increasingly being inconsistency making the depositors lack credibility with the bank if further measures are not taken to prevent the challenge. Hence, the European Central Bank should consider bringing out monetary pillar to his policy as well; he should work on growing monetary aggregates efficiently. One way that he can achieve the objective is through establishing achievable short-term and long-term goals for money growth as well the bank should embark on committing itself to achieve the set goal.

Quantitative analyses estimate the possible interest rate that European Central Bank estimated, and the new estimates serve it. Both qualitative and qualitative studies present that the bank is working more on future inflation deviations, which delays the initial objective. The main concern for a bank like the European Central Bank is that it should build credibility to gain trust from its depositors and the Europe government as a way of preventing further inflation mess. The bank is set to face difficulties if, in the long run, it will trade inflation off through creating unemployment and other relevant real activity measures.