TAILIEUCHUNG - DO EUROPEAN CENTRAL BANK’S STATEMENTS STEER INTEREST RATES IN THE EURO ZONE?*

Interest rate swap terms typically are set so that the pres ent value of the counterparty payments is at least equal to the present value of the payments to be received. Present value is a way of comparing the value of cash flows now with the value of cash flows in the future. A dollar today is worth more than a dollar in the future because cash flows available today can be invested and grown. The basic premise to an interest rate swap is that the coun terparty choosing to pay the fixed rate and the counterpar ty choosing to pay the floating. | The Manchester School Supplement 2006 1463-6786 116-139 DO EUROPEAN CENTRAL BANK S STATEMENTS STEER INTEREST RATES IN THE EURO ZONE by MARIE MUSARD-GIES IXIS Corporate Investment Bank and University of Orleans LEO In this study we aim at testing whether press conferences held after the meeting of the European Central Bank s monetary policy council steer market interest rates in the Euro zone. To meet this goal we quantify the statements according to whether they are neutral hawkish or dovish. We show using a principal components analysis that market interest rates react significantly to the bias in statements and more particularly to changes in statements from one meeting to the next. Moreover we find that the short end of the yield curve reacts more sharply to statements than the long segment the effect of statements peaks on interest rates with a maturity of 6 or 12 months and is smaller for the longer maturities. Using non-parametric tests confirms our previous results. 1 Introduction Recent studies highlight the role played by the Fed s statements on the day of the Federal Open Market Committee FOMC meeting. It s not what they do it s what they say this was the sort of thing one could read in financial papers in The statement that followed the 28 January 2004 meeting led to record reactions in the Treasuries market two- and five-year interest rates rose 21 and 25 basis points respectively in the half hour that followed the announcement . the largest moves recorded in the past 15 years . This excessive reaction was triggered by what the Fed had said and not by what it had done the decision to leave interest rates unchanged was perfectly expected by the financial markets but the FOMC s decision to delete the sentence policy accommodation can be maintained for a considerable period and replace it by the Committee believes it can be patient in removing its policy accommodation was interpreted by the financial markets as a signal that the Fed was going to

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