The Missing Surprise: Transmission Protection in Central Bank Announcements

Figure 1.  Time series of the five identified dimensions of ECB policy surprises

Non-Technical Summary

Central bank announcements often contain information besides decisions on interest rates. They can also reassure financial markets that the central bank stands ready to prevent financial stress from disrupting the transmission of monetary policy. Such interventions have become an important feature of central banking — not only in the euro area, but also in episodes such as the Bank of England's response to the 2022 LDI crisis and the Federal Reserve's actions following the failure of Silicon Valley Bank 2023. This paper asks whether these messages can be measured separately from conventional monetary policy surprises and central bank information effects regarding the state of the economy, and how doing so matters for our understanding of central bank policies.

The paper uses minute-by-minute movements in 16 financial-market prices on ECB announcement days to separate the different messages contained in ECB communication. The key idea is that different policy messages generate distinct patterns of volatility across financial markets as an announcement unfolds. These differences allow the method to statistically disentangle five policy dimensions without imposing in advance how each of them should affect individual asset prices. This flexibility is important because both the content of ECB announcements and their effects on financial markets can change over time. For example, news about asset purchases need not move short- and long-term interest rates by the same relative amounts at every meeting. Similarly, some policy dimensions may be important at one meeting but essentially absent at another. By exploiting the rich information contained in minute-by-minute price movements, the method therefore allows both the mix of policy messages and their financial-market effects to differ across announcements.

This makes it possible to identify a new type of surprise — transmission protection — which captures news about the ECB's willingness to safeguard the smooth transmission of monetary policy by preventing fragmentation in sovereign bond markets. Unlike conventional policy-rate or forward-guidance surprises, transmission protection news occurs only from time to time, when such concerns become relevant for ECB communication. Figure 1 presents a novel time series of the five identified dimensions of ECB policy surprises — policy rate, forward guidance, asset purchases, transmission protection, and central bank information — for scheduled Governing Council meetings and selected unscheduled events, including Mario Draghi's "whatever it takes" speech in July 2012.

The analysis delivers four main findings. First, transmission protection is a distinct and economically important component of ECB communication, separate from interest-rate decisions and the ECB's assessment of the economy. Second, these announcements primarily reduce financial stress by lowering sovereign risk and easing concerns about market fragmentation and euro-area dissolution risk. Third, ignoring transmission protection can lead to a misleading interpretation of financial-market reactions to monetary policy announcements. Fourth, the estimated volatility patterns closely track the timing of key statements and even specific language used during press conferences, helping to identify which messages drive market reactions. Overall, the new approach provides a clearer picture of which ECB announcements and communication strategies have been most effective over time, offering useful lessons for future policy design.

Keywords: Monetary Policy, High-Frequency Identification, Central Bank Communication, Information Effects, Financial Stability, Transmission Protection.

Codes JEL : E52, E58, F45, G12