By Francesco Canepa

FRANKFURT, Reuters – The last thing central bankers would like to associate with is panic.

That is exactly what two of Europe’s top Central Bank watchers use to describe Christine Lagarde’s message to her. She opened the doors to a rate increase in 2022 to combat record-high inflation.

Lagarde’s comments last week – unexpected as she previously all but ruled out a hike in rates this year – were taken by investors as a sign that the ECB was likely to tighten its policy quickly, sending borrowing costs soaring throughout the 19-country Euro zone. Despite Lagarde’s attempts to soften her words, the yields on government bonds have not lost their gains.

There can be only one conclusion, communication mission failed. “This is ‘from patience and panic’,” Carsten Brzeski, ING economist said via Twitter (NYSE:).

His contrast was with Mario Draghi’s predecessor, Lagarde. Mario Draghi famously stopped speculation of a euro breakup in 2012 with three words: “Whatever it takes”.

Brzeski said in an interview that “if you compare it to the Draghi Era, it’s extremely difficult for market to decide who to listen too.”

When it comes to managing expectations of the market, investors’ trust in a central banking’s communication is undoubtedly its most important asset. It’s something all central bankers including Draghi have struggled with.

However, a poor slip of her tongue when Lagarde claimed the ECB did not close bond spreads to help struggling countries at the onset the coronavirus epidemic has resulted in increased market scrutiny.

This is made more difficult by the volatility of a Pandemic-era economy, and her desire for a common consensus among ECB policymakers.

Sources told Reuters that a significant minority of policymakers taking a hawkish stance against inflation would like to see the meeting begin dialling down stimulus.

Erik F. Nielsen (UniCredit chief economist) stated in a research paper that Lagarde “panicked” and moved to the hawkish side in order to avoid a Draghi-era return to public discord (especially in Germany).

Interview: He said that “if an institution’s president is swinging between two sides, it is hard to deliver a consistent message.”

DISCONNECT

Following Thursday’s Lagarde news conference, investors expressed concern about when Lagarde would end the bond-buying program and raise interest rates.

Analysts believe the former will happen before year end. Money markets also expect that the ECB’s interest rate on deposits will rise to zero in December. It is currently at -0.5%.

This disconnect is among the largest between market expectations, and the ECB’s official guidance. The guidance calls for rates to remain at their current record-low level or be reduced, as it was implemented in 2013.

Another ECB observer, Pictet economist Frederik ducrozet asked on Twitter if Lagarde would have to do a remedial interview after she made remarks that had upset bond markets in March 2020.

Lagarde stated Monday to the European Parliament that there is no indication of a “measurable tightening of policy”. Paul Donovan of UBS Global Wealth Management described this speech as “accompanied with loud splashing sounds, suggesting policy had been inexpertly rowed forwards”.

However, Lagarde’s message has not yet soothed market nerves. This is a problem especially for Italy and Greece which have depended on the ECB bond purchases to maintain their financing costs throughout the coronavirus epidemic.

The yield on Italian 10-year government bonds has jumped to 1.4% from 1.8% within days. On Greek counterparts, it has risen from 1.8% from 2.5% in just a few days. However, the risk premiums for these debts have increased when compared with ultra-safe Germany.

Lagarde’s assurances to investors that the ECB can control spreads using a wide range of tools, including reinvesting profits from mature bonds purchased as part of quantitative easing (QE), hasn’t reassured them either.

The spreads increased dramatically as QE is not available. What tools are there? Nielsen from UniCredit said it. “We have only investments. But whether it’s enough, nobody seems to believe.”

Vitor Constancio, former vice president of the ECB, criticized its hawkish approach after two records inflation readings. He compared its policy setting with “looking out to the window”, a citation by Alan Blinder in the United States.

Constancio tweeted, “Central Banks must look forward and must therefore use models and projections. Adding, of course. some judgement.”

It is not a good strategy to monetary policy to look out of the window and see the temperature before making a decision.