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'Semi-Rude' Draghi, 'Jump the Gun' Carney Criticized

Friday, 5 Jul 2013 | 2:36 AM ET
Sean Gallup | Getty Images

European stocks may have loved the forward guidance issued by both the European Central Bank (ECB) and the Bank of England (BoE), but some economists have expressed their concern over the move, arguing that it reeks of desperation.

The Bank of England's new governor Mark Carney released a surprise statement on Thursday alongside an otherwise ordinary rate decision, whilst ECB President Mario Draghi topped the bill by indicating that the central bank expects interest rates to remain "at present or lower levels for an extended period of time."

The markets simply loved the news. The pan-European FTSEurofirst 300 Index closed nearly 2.5 percent higher, clocking its biggest rise since April and the U.K.'s FTSE surged 3.1 percent—its biggest gain for 20 months. But Steen Jakobsen, the chief economist at Saxo Bank said this willingness to communicate has led him to become less confident.

(Read More: Carney Shows Markets Who's Boss; Sterling Falls)

"Ultimately what they are telling (us) is: We have tried everything—now we can only talk to you— dazzle you with our ability to make a song and a dance," he said in a research note on Thursday.

What was more surprising at Thursday's ECB press conference which followed the rate decision, was the body language of Mario Draghi as he sold his "unprecedented" forward guidance, Jakobsen said.

Anchor Grills Draghi on Forward Guidance
CNCB's Geoff Cutmore asks the ECB President Mario Draghi if the central bank should change its policy on guidance, as the Bank of England has done following Mark Carney's arrival.

In one altercation with CNBC's Geoff Cutmore, Draghi fired a repeated retort that Cutmore "hadn't listened" to his statement when asked about forward guidance and when interest rates were likely to move higher.

"He was semi-rude to reporters," Jakobsen said. "He was in my opinion extremely unbalanced in his body language, maybe a sign of what is at stake but also a kind of desperation. ... He also clearly felt this was another Draghi 'star moment.' "

(Read More: Euro Slides as Draghi Commits to Low Rates)

The less opaque communications mark a new strategy from the European Central Bank, following the U.S. Federal Reserve Chairman Ben Bernanke giving markets a road map for when asset-purchases may start to ease. Previously, Draghi and his predecessor Jean-Claude Trichet regularly explained that they never pre-committed on policy decisions.

'Jump the Gun' Carney

But it wasn't just the European Central Bank that got in on the act; less than two hours earlier the Bank of England released a surprise statement on future policy on what was Mark Carney's fourth day at the helm.

Responding to the recent rise to 2.5 percent in 10-year benchmark gilt yields, the statement read that the "implied rise in the expected future path of Bank Rate was not warranted". Sterling quickly fell lower against dollar, gilt yields ticked lower and the FTSE 100 burst higher on the assumption that monetary policy would now be looser for longer.

But Andrew Sentance, a former member of the Bank of England's monetary policy committee believes that Mark Carney "jumped the gun."

"We could be more confident about this type of forward guidance if the MPC's [Monetary Policy Committee] forecasting record had been more accurate in recent years. Unfortunately, the opposite has been the case," he wrote on his website on Thursday.

(Read More: July 4: Central Bank Independence Day?)

"In particular, the MPC has consistently under-predicted inflation—its key target variable. And the negative reaction of the pound to the latest MPC announcement suggests that there may be more imported inflation in the pipeline over the next few months."

ECB's 'Forward Guidance' Is a Stretch: Pro
Derek Halpenny, European head of global currency research at the Bank of Tokyo-Mitsubishi, tells CNBC that Mario Draghi can change forward guidance whenever he wants, so it's not really forward guidance.

Sentance believes the bank should instead link clear policy moves to the future path of the economy and called this type of guidance as a "step too far."

Central banks face a strategic problem of exiting from emergency monetary policies after the financial crisis of 2008, he said, adding that the challenge for Draghi, Carney and Bernanke was to recognize and address this challenge.

"The longer they delay, by promising continued very low interest rates, the bigger the problem becomes for the future," he said.

This type of guidance also had Derek Halpenny, European head of global currency research at the Bank of Tokyo-Mitsubishi concerned over market volatility in the future.

Once the ECB has written in a statement it expects interest rates to be lower for "an extended period of time" then at some point it will need to remove it, Halpenny said.

"The markets are going to go 'Oh, they are going to be hiking rates at the next meeting'. When of course that's probably not what they mean," he told CNBC Friday.

"Because they haven't defined extended period it opens up for a lot of uncertainty."

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81.

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