We compare the path of the ECB policy rate (deposit facility rate) expected by financial market analysts with simple monetary policy rules based on their own expectations regarding inflation and economic activity. To this end, we adopt a thick-modelling approach to account for the uncertainty surrounding the exact parametrization of the rule according to analysts. We show that, since the ECB monetary policy moved away from the effective lower bound (ELB) and stopped providing explicit forward guidance on the future path of the policy rate, policy rate expectations have become largely aligned with those implied by the rules. We also document three additional findings.
First, growing perceptions of downward demand-side risks since spring 2023 have been associated with an adjustment of analysts' rate expectations to slightly below rule-implied rates. Second, the significant and continuous upward revisions of expected ECB rates observed during the 2022-23 rate hiking cycle have mainly resulted from upward revisions of expected inflation and expectations of a higher long-run policy rate. Third, analysts' rate expectations appear to be shaped more by expectations regarding core inflation than those of headline inflation.
Forthcoming in: Economics Letters.
