If the U.S. Federal Reserve killed off forward guidance in June, the European Central Bank may have just hammered the final nail in the coffin of a tool officials had long used to provide monetary policy signals to financial markets.
The ECB delivered a half-percentage-point rate hike on Thursday, double what it flagged in June when setting out its policy-tightening plans. It had appeared to change tack earlier this week, when sources told Reuters a bigger rate hike was now under consideration.
But inflation is back with a vengeance, having surged to an annualised rate of 8.6% in the euro zone in June on the back of explosive energy and food prices. The data rendered obsolete the ECB's pledge to kick off rate hikes with a modest move.The Fed's change of heart came less than a week after a big May inflation print showed inflation had not peaked.And between the Fed and ECB, came the Bank of Canada's surprise full-percentage-point rate increase on July 13.
"As data comes out in the course of that period between the start of guidance and the actual time to deliver those hikes ... and speculation starts to come in, that can increase volatility in itself," Hill added.