Punchline: In an earlier post, I found little evidence that the SNB–ECB policy rate spread drives the CHF/euro exchange rate, likely because the ECB’s unconventional policies make its policy rate a poor guide to its stance.
This is wonderfully nerdy in the best way :) and refreshingly clear for a topic that usually makes most eyes glaze over by line three.
What really stands out is how shifting from blunt tools like policy rates to 2-year yield spreads gives a much sharper picture of market sentiment and future policy expectations. Especially when you consider how heavily the ECB leans on non-standard measures like QE and TLTROs, which quietly distort the usefulness of the headline rate.
How do you think central banks themselves view this growing reliance on market-implied signals versus their official tools?
Thank you Stefan - is it possible to provide an example from past recent history to illustrate the change in the Euro 2 yields/SNB policy spread and contemporaneous change in the exchange rate? Much appreciate the insightful study you presented.
This is wonderfully nerdy in the best way :) and refreshingly clear for a topic that usually makes most eyes glaze over by line three.
What really stands out is how shifting from blunt tools like policy rates to 2-year yield spreads gives a much sharper picture of market sentiment and future policy expectations. Especially when you consider how heavily the ECB leans on non-standard measures like QE and TLTROs, which quietly distort the usefulness of the headline rate.
How do you think central banks themselves view this growing reliance on market-implied signals versus their official tools?
Thank you — I take that comment in the positive way I think it was intended. Is the style of today’s post better?
(Oh, central banks don’t care about the use of market signals — they know that is a key part of how policy works.)
Thank you Stefan - is it possible to provide an example from past recent history to illustrate the change in the Euro 2 yields/SNB policy spread and contemporaneous change in the exchange rate? Much appreciate the insightful study you presented.