Monetary policy communication according to artificial intelligence Monthly Report March 2025
Published on 3/18/2025
Monetary policy communication according to artificial intelligence Monthly Report March 2025
Central banks use press conferences and other public statements to communicate their monetary policy decisions and their assessments of economic developments. This influences market participants’ expectations regarding the future monetary policy stance. Communication, like conventional monetary policy instruments, can thus have an impact on aggregate demand and inflation dynamics. A significant factor in the signal effect of communication is whether the statements are indicative of restrictive or accommodative monetary policy, commonly referred to as “hawkish” and “dovish”, respectively. An optimistic or pessimistic tone can also change the effect.
At present, state-of-the-art technologies such as artificial intelligence (AI) are increasingly being used to analyse monetary policy communication in an efficient way. The Bundesbank has developed a novel AI model named the Monetary-Intelligent Language Agent (MILA) that can produce detailed, consistent and transparent evaluations of monetary policy texts. MILA classifies individual sentences, taking into account the macroeconomic context, and justifies its own assessment. On the basis of this sentence-by-sentence classification, the model calculates a comprehensible evaluation of the overall text.
According to MILA, the communication by the ECB Governing Council between 2011 and 2024 was broadly in line with the macroeconomic environment in the euro area. Monetary policy communication was predominantly dovish, especially at the peak of the coronavirus pandemic in 2020. In 2021, the Governing Council increasingly balanced its inflation narrative, but communication on key interest rates initially remained dovish. For the period of monetary policy tightening between 2022 and 2023, MILA sees a marked shift towards hawkish press conferences and speeches. In 2024, communication became more balanced.
AI analysis does not replace human expertise, but improves the understanding of monetary policy communication and its impact. However, the increasing prevalence of AI analyses could also reduce the incentives for different market participants to obtain and evaluate their own information. This could lead to lesser diversity of opinion and make central bank communication more challenging. Critical examination of AI-assisted text analysis and the associated risks therefore remains essential.
1 The role of communication in monetary policy
In recent decades, central bank communication has taken on an increasingly important role in monetary policy. It is now a key instrument in the established toolkit that central banks use to steer their monetary policy stance (see the supplementary information entitled “Measuring the monetary policy stance”). In fact, some economists even argue that communication is the single most important monetary policy instrument. 1 Monetary policy communication through press conferences, speeches and other public statements conveys messages about monetary policy decisions and the state of the economy. 2 These messages, in turn, influence market participants’ expectations and thus also market interest rates, which are of critical importance for financing conditions and the transmission of monetary policy. In this way, through additional signal effects, communication complements and supports the direct impact of changes to key interest rates or asset purchase programmes.
Monetary policy communication sends direct and indirect signals about the monetary policy stance, particularly regarding the future path of key interest rates. Direct information is represented by statements by the central bank concerning monetary policy instruments, primarily including statements on its current decisions and signals regarding the future path of key interest rates. 3 Indirect information is transmitted by the central bank via the economic narrative, which consists, in particular, of its assessment of the current and future path of inflation and the real economy.
Direct and indirect information can be “hawkish” or “dovish”, indicating rising or high key interest rates and falling or low key interest rates, respectively. “Hawkish” describes a position advocating restrictive monetary policy to safeguard price stability. Such communication emphasises the need to raise key interest rates, or maintain them at an elevated level, in order to combat high rates of inflation. A “dovish” stance, by contrast, is in favour of accommodative monetary policy. Dovish statements argue for lowering key interest rates, or maintaining them at a low level, in order to stimulate aggregate demand and thereby bring up excessively low rates of inflation. If market participants perceive communication to be unexpectedly hawkish or dovish, they will adjust their expectations about the future monetary policy stance. Surprising communication can thus have an impact on growth and inflation. 4
Furthermore, a role in the monetary policy signal effect is also played by whether communication exhibits positive or negative sentiment. Positive statements by the central bank about the economic situation or inflation dynamics can boost optimism in markets and among the general public. 5 By contrast, negative statements – e.g. about undesirable economic developments, uncertainties or risks – can lead to pessimism. 6 For this reason, the sentiment of the economic narrative also shapes market participants’ expectations about future monetary policy measures and economic developments. 7 This can likewise affect actual consumption and investment decisions. Sentiment depends largely on the inflation context: a hypothetical statement of “price pressures are rising” would be considered positive if inflation were below target, but negative if inflation were above target. In both instances, however, this statement would be classified as hawkish. The aspects of positivity and negativity are therefore not equivalent to the aspects of hawkishness and dovishness. Moreover, normative statements using the two scales should only be derived with consideration of the overall macroeconomic context. The assessment of whether specific communication is consistent with the targeted objectives from the perspective of monetary policy decision-makers must always take account of the economic situation and the correspondingly appropriate monetary policy stance. 8
In the Eurosystem, press conferences following the meetings of the ECB Governing Council play a key role in communication with the public. Following monetary policy meetings of the ECB Governing Council, the monetary policy decisions taken are published in a “Monetary policy decisions” press release. This is followed by a press conference opening with a speech by the ECB President, which, since the rollout of the new monetary policy strategy in July 2021, has been known as the “Monetary policy statement”. 9 In addition to an explanation of the monetary policy decisions, this also includes the Governing Council’s assessment of current economic developments. The analysis presented in this article focuses on texts from this first part of the press conferences during the period from November 2011 (the beginning of Mario Draghi’s term as ECB President) to December 2024. It abstracts from the second part of the press conference, in which the ECB President answers questions from members of the press. 10 Furthermore, monetary policy speeches by the ECB Executive Board during the period from November 2011 to August 2024 are also analysed. Public statements by central bank representatives can explain past decisions or provide individual viewpoints on economic developments. Speeches thus transmit relevant monetary policy signals in the periods between the official meetings of the ECB Governing Council. The analysis comprises a total of 119 monetary policy statements and 377 speeches. 11
Supplementary information
Measuring the monetary policy stance
The monetary policy stance is multidimensional due to the use of multiple monetary policy instruments. The various monetary policy instruments have differing effects on the maturity segments of the yield curve, on asset prices and on exchange rates. 1 While the level of key interest rates is crucial, especially for very short-term market rates, communication plays a key role for medium-term market rates. Central banks’ asset purchases affect longer-term maturities, in particular. This is relevant because the entire yield curve is crucial for monetary policy transmission, i.e. the impact of monetary policy on households’ and firms’ consumption and investment decisions. 2 In addition, the use of monetary policy instruments affects risk premia in a broad spectrum of different financial market segments, especially through investors’ varying risk appetite. 3 It may therefore be insufficient to assess the monetary policy stance solely on the basis of the level of key interest rates. For example, the ECB key interest rate stood at 4% in both March 2024 and August 2007, while the ten-year OIS rate stood at 2.5% and 4.6%, respectively. Measured by the level of this long-term interest rate, the monetary policy stance may therefore have been less restrictive in March 2024 than in August 2007.
A comprehensive measure of the monetary policy stance is the Bundesbank’s proxy monetary policy rate (PMPR), which combines information from the risk-free yield curve and risky asset prices. This indicator is based on 11 financial market variables: risk-free interest rates over various maturities, yields on government and corporate bonds, spreads and the effective exchange rate of the euro. These financial market prices are available on a daily basis, which means that the indicator of the monetary policy stance can also be calculated at the same frequency. To this end, a statistical approach in the form of a principal component analysis is used to identify the typical co-movement among the financial variables. First, two common factors are extracted. 4 These are then used in a regression as explanatory variables for the short-term interest rate (the OIS interest rate with a maturity of seven days) for the period from 2005 to 2012 (before the key interest rates reached the effective lower bound). The estimated values from this regression over the entire observation period yield the PMPR.
The PMPR suggests that the monetary policy stance between 2012 and 2021 was considerably more accommodative than signalled by key interest rates in isolation (see Chart 4.1). Before 2012, the dynamics of the PMPR and the short-term interest rate were, by construction, largely similar – the regression serves to ensure that the indicator largely corresponds to the short-term interest rate during this period, as monetary policy was steered almost exclusively by the policy rate at that time. After 2012, however, the indicator reflects the impact of other monetary policy instruments that were introduced after the effective lower bound had been reached. The PMPR suggests that forward guidance and central bank asset purchase programmes made the monetary policy stance considerably more accommodative at the lower bound. 5 According to the indicator, this effect was equivalent to a further reduction in key interest rates of around 150 basis points.
According to the PMPR, between 2022 and 2023, the extent of monetary policy tightening was comparable to the actual rise in key interest rates. Based on the PMPR, however, the monetary policy tightening began as early as the start of 2022, i.e. six months before the first interest rate hike. This reflects the fact that the anticipation effects of future key interest rate changes are captured at an early stage by the PMPR via their impact on medium-term and long-term interest rates. 6 The indicator shows that the maximum tightening impulse was in September 2023, when key interest rates were last raised. The stance has recently been more accommodative, in some cases considerably so, than the short-term interest rates suggest. This is a reflection of lower medium-term and long-term interest rates as well as narrower spreads on government and corporate bonds by historical standards. 7
2 History of monetary policy communication analysis
In light of the increasingly transparent communication strategies of central banks since the 1990s, market participants have been focusing greater attention on analysing monetary policy statements. Traditionally, central bank circles believed that monetary policy decision-makers should communicate with the public as little as possible and only cryptically. Over the past three decades, however, the predominant view has changed: now, the prevailing standpoint is that transparent communication can directly affect market participants’ expectations and thereby improve the efficiency of monetary policy. 12 With this paradigm shift in the style of central bank communication, market participants began to intensively examine monetary policy statements using their human expertise. In particular, the ability to correctly interpret and identify nuances in communication became a valuable asset. This is because, from the perspective of financial markets, even minor signals from central bank representatives can contain meaningful information and thus lead to strong market reactions. 13 For example, the euro depreciated significantly in October 2000 when ECB President Wim Duisenberg indicated that the ECB would no longer support the currency. The statement by ECB President Mario Draghi in July 2012 that “the ECB [was] ready to do whatever it [took] to preserve the euro” also had a profound impact on markets.
Economic research has traditionally made use of human expertise to assess and quantify the characteristics of central bank communication. Economists assess monetary policy texts manually, analysing the monetary policy stance and sentiment, in particular. Here, based on the human assessment, texts or individual text excerpts are assigned a numerical value: -1 for dovish statements, 0 for neutral statements, and +1 for hawkish statements; and -1 for negative sentiment, 0 for neutral sentiment, and +1 for positive sentiment. 14 This human classification offers numerous benefits. The specialist expertise utilised here enables contextual factors that are vital for interpreting monetary policy communication to be comprehensively incorporated and quantitatively condensed. In addition, it allows for a flexible response to differing or nuanced formulations as well as highly detailed evaluations of the texts. However, the advantages of human classification are offset by some key disadvantages. These assessments are, by their very nature, subjective and may be inconsistent over time, which can lead to misclassifications. Furthermore, this type of analysis takes a considerable amount of time.
To address the limitations of human classification, computer-assisted algorithms based on word frequencies have been developed. This methodology creates a lexicon of terms or word combinations that typically appear in monetary policy texts. 15 Each entry in this lexicon is assigned a specific classification: for example, the combination of “inflation” and “rising” is classified as hawkish, while “growth” in conjunction with “falling” is classified as dovish. Using these categorisations, it is possible to determine the frequency of dovish or hawkish (or, alternatively, negative and positive) word combinations within a given text. On this basis, a score on a scale from -1 to +1 can be calculated for the entire text. Sentiment is usually determined by calculating the difference between the numbers of positive and negative sentences and then dividing this by the total number of non-neutral sentences:
An overall value for the monetary policy stance can be calculated in a similar way using the numbers of hawkish and dovish sentences instead. The methodology using word frequencies has the major advantage of formal transparency and allows for consistent, detailed and comparatively fast evaluation. However, it is fairly mechanical in its application and cannot take the context of the text into consideration. As a result, this method responds sensitively to linguistic nuances and minor variations in terminology, and is therefore susceptible to misclassification.
In more recent times, analysis using artificial intelligence – especially large language models – has proven promising. Large language models (LLMs) are trained on extensive text data. This enables them to process and interpret natural language (natural language processing, or NLP). This includes computer-assisted text preparation (“text mining”) as well as the identification and evaluation of statistical language patterns (“machine learning”). At first, specialised language models were used in economic research to evaluate monetary policy communication. 16 These models were trained using large volumes of text data and optimised using manually classified sentences from financial market or central bank contexts. Unlike the word frequency approach, this first generation of language models is, to a limited extent, able to take the immediate context of a text into consideration. However, their analysis is less transparent and still neglects information beyond the actual text excerpt itself. By contrast, the latest LLMs (such as GPT, Llama and Gemini) are able to factor in additional information provided by the user and justify their assessments (see the supplementary information entitled “How large language models work”). With regard to the analysis of central bank communication, they thus offer the potential to combine the advantages of previous approaches, in particular the flexibility of human analysis with the automation of the word frequency methodology. 17 However, a key challenge when analysing texts with LLMs is obtaining a granular and transparent assessment. The next section presents a novel AI model that can carry out such an analysis.
Supplementary information
How large language models work
Large language models (LLMs) are a form of artificial intelligence (AI) specifically designed to understand and generate natural language. These models are based on neural network models consisting of multiple interlinked layers of neurons and are capable of recognising complex patterns in data. Each layer processes the input data and transmits the results to the next layer, through which the model learns increasingly abstract attributes of the data. Using activation functions between the layers enables non-linearities to be modelled.
The Transformer architecture is one innovative type of these neural networks. Transformers were popularised by models such as Google AI’s BERT (Bidirectional Encoder Representations from Transformers) and Open AI’s Generative Pre-trained Transformer (GPT) models and are based on the attention mechanism.They can capture words within a section of text, irrespective of their position, by using selective weights to understand the context. This enables them to recognise relationships between words that are far apart, which is a decisive factor in the processing of natural language. This represents a significant advantage over models from the previous generation, which were specifically designed for sequential data processing (recurrent neural networks (RNN)).
LLMs are trained using enormous amounts of text data from various sources such as books, articles and websites, and their response accuracy is optimised by extensive evaluation measures. By being trained on these extensive datasets, the model recognises complex patterns and semantic relationships in the language, allowing it to create contextual content on a variety of topics that is often barely distinguishable from human-generated text. LLMs use techniques such as self-supervised learning, where the next token (word or character) is predicted based on the context of the previous tokens. This results in a deep understanding of syntax, grammar, and stylistic nuances, allowing LLMs to be used in a wide range of applications. In addition, the performance of the models is evaluated and improved through reinforcement learning from human feedback (RLHF). In this approach, humans provide feedback on the generated texts, which is then used to further optimise the model and improve its ability to create high-quality and relevant content.
Although LLMs are often referred to as AI, they do not possess any real awareness or intelligence. They generate responses based on the statistical patterns learnt from their training data and can therefore occasionally produce errors or inaccurate responses (hallucination). Nevertheless, the development and application of LLMs represent significant technological progress with the potential to transform and improve many aspects of our everyday lives.
3 Monetary-Intelligent Language Agent (MILA)
The Bundesbank has developed a new model called the Monetary-Intelligent Language Agent (MILA) for the purposes of analysing central bank communication. 18 MILA is an AI model that analyses monetary policy texts in an automated and rules-based manner. The model approaches the task in a granular, transparent and consistent way: it assesses individual sentences taking into account contextual information, justifies its classification and provides an assessment for the overall text using mathematical formulae. Decomposing the text into individual sentences makes for greater transparency in the analysis, as this unit of text can be understood and assessed on a standalone basis by humans. This means that the human assessment of a sentence can be compared directly with the classification and associated justification produced by AI and checked for plausibility. Human readers can therefore easily interpret and evaluate the results.
MILA is based on state-of-the-art language models, chained instructions and manual sample responses. At its heart is a very powerful language model called Llama 3.1 70B. 19 The methodology for analysing central bank communication is based on established concepts applied when interacting with AI-based language models (prompt engineering). The language model is assigned the identity of an economist specialised in monetary policy analysis at a central bank (role-based prompting). Prompt chaining is employed, with the model being given a set of multi-step instructions to follow as it analyses a monetary policy text. 20 In addition to the specific task, each work step includes sample texts demonstrating a correct assessment in the eyes of an expert (few-shot prompting). 21 The examples also specify that a brief explanation should be provided before the actual classification in order to reduce the risk of the language model producing inaccurate assessments. 22 The following section describes the way in which MILA approaches the task of analysing ECB press conferences (see Chart 4.2). 23
MILA’s first step when presented with an ECB press conference is to derive the inflation context; this inflation context serves as background information for the actual classification. Information on current inflation dynamics is a crucial component when analysing many statements concerning monetary policy. For example, the hypothetical remark “inflation rose last month” can only be accurately classified as positive or negative if one knows where inflation stands at the time. 24 If inflation were above the 2% target, the statement would be negative; if inflation were below target, the statement would be positive. Furthermore, the fact that the ECB Governing Council aims for an inflation rate of 2% over the medium term means that medium-term inflation expectations are a relevant part of examining many other statements. MILA extracts the inflation context from the MPSs made when new ECB/Eurosystem staff macroeconomic projections are released (March, June, September and December). 25
MILA then proceeds by analysing the communication in ECB press conferences on monetary policy instruments and assessing whether it is hawkish or dovish. The opening paragraph of the MPS typically lays out the decisions taken by the ECB Governing Council along with explanations and comments on the planned trajectory going forward. MILA analyses this section of the text along four dimensions: interest rate decision, interest rate outlook, inflation, and general tone. A pre-defined scoring system is used to formulate a “Decision Hawk-O-Meter” from the assessment of these dimensions. 26 This indicator reflects the degree of hawkishness or dovishness of direct monetary policy communication in the eyes of the digital economist. The scale ranges from -1 (very dovish) to +1 (very hawkish).
In a third step, MILA examines the hawkishness or dovishness of the economic narrative by classifying individual sentences from the press conference. Once the monetary policy decisions have been presented, ECB press conferences feature a detailed economic narrative. 27 This section covers the Governing Council’s assessment of real economic developments, inflation dynamics, and the financial and monetary landscape. Each sentence is classified into one of five categories: dovish, moderately dovish, neutral, moderately hawkish, hawkish (see the supplementary information entitled “Examples of classifications by MILA”). When performing its assessment, MILA draws on additional context by taking account of the inflation context for the date in question that was ascertained in the first step plus the monetary policy decisions as well as previous sentences. On the basis of the sentence-level classification, a Hawk-O-Meter for the entire economic narrative in the text at hand is calculated outside of the LLM by applying the following formula: 28
The resulting indicator can be interpreted in economic terms: a text’s Hawk-O-Meter takes a value of -1 if MILA assesses all statements as being dovish and a value of +1 if it assesses all statements as being hawkish. In addition to looking at the narrative as a whole, it is also possible to make a differentiated analysis, focusing on specific thematic aspects. 29 For example, MILA is also capable of calculating the Hawk-O-Meter just for statements directly related to inflation or the real economy.
MILA also conducts a sentence-level analysis of the sentiment of an MPS as a whole and determines whether it is positive, neutral or negative. As discussed in the section entitled “The role of communication in monetary policy”, the sentiment dimension is not to be conflated with the hawkishness or dovishness of monetary policy. For instance, a press conference might see the ECB Governing Council communicating in a hawkish and positive manner or in a hawkish and negative manner (for illustrations, see the supplementary information entitled “Examples of classifications by MILA”). The sentiment metric therefore differs from the Hawk-O-Meter for the economic narrative described above. At this stage in the procedure, MILA again examines individual sentences, but this time they are classified as positive, neutral or negative. In order to ensure that the output focuses on the economic narrative, the entire MPS is taken into account, but statements without a direct reference to economic developments or monetary policy decisions are classed as neutral. Formula (1) is used to calculate the sentiment for the text as a whole: the indicator takes a value of -1 if the text contains only negative sentences and a value of +1 if the text contains only positive sentences.
MILA is also capable of analysing speeches given by members of the ECB Governing Council. When doing so, MILA starts by examining whether the speech is related to monetary policy and thus whether it makes sense to attempt to characterise it in terms of hawkishness or dovishness. 30 Provided that a speech is deemed to be of a monetary policy nature, MILA then proceeds to generate the Hawk-O-Meter and the sentiment metric for the economic narrative according to the procedure described above. The classification process draws on the inflation context derived from ECB press conferences. A Decision Hawk-O-Meter can also be calculated, factoring in all sentences related directly to monetary policy instruments. 31
Supplementary information
Examples of classifications by MILA
Table 4.1 lists various examples of how MILA classifies monetary policy sentences and justifies its own assessments.
Table 4.1: Examples of classifications by MILA1
Sentence
Source
Hawk-O-Meter
Justification for Hawk-O-Meter
Sentiment
Justification for sentiment
“Domestic inflation is still elevated, as wage pressures in the euro area remain strong.”
ECB press conference, 17 October 2024
Hawkish
The sentence is classified as hawkish because it explicitly refers to upside risks to price stability, particularly to strong wage pressures, which could raise the inflation rate above target.
Negative
The sentence is classified as negative because it indicates that domestic inflation remains high due to rising wages, signalling that inflation, despite expectations of a decline, will not fall back down to target over the course of the following year.
“Annual inflation fell further to 1.7 % in September, its lowest level since April 2021.”
ECB press conference, 17 October 2024
Dovish
The sentence is classified as dovish because inflation is below target, which could indicate the need for monetary policy accommodation to support price stability.
Negative
The sentence is classified as negative because it indicates that the current rate of inflation is below the ECB’s target and has continued to fall, moving it further away from the target of 2 %.
“The Governing Council expresses its full support to the people of Ukraine.”
ECB press conference, 10 March 2024
Neutral
The sentence is classified as neutral as it has no impact on monetary policy or the economic context; it therefore has no relation to inflation or the ECB’s mandate.
Neutral
The sentence is classified as neutral because it provides a declaration of support and solidarity but does not convey economic information or sentiment regarding inflation or economic conditions.
“The Russian invasion of Ukraine is a watershed for Europe.”
ECB press conference, 10 March 2024
Neutral
The sentence is classified as neutral as it contains no information on inflation, monetary policy or economic developments.
Negative
The sentence is classified as negative because it refers to a significant and potentially destabilising event – Russia’s war of aggression against Ukraine – which could have far-reaching and adverse consequences for stability and the economy in Europe.
“The current increase in inflation is expected to be largely temporary and underlying price pressures are building up only slowly.”
ECB press conference, 9 September 2021
Moderately dovish
The sentence is classified as moderately dovish because it suggests that inflationary pressures are temporary and will build up only gradually, reducing the need for immediate monetary policy tightening, but not necessarily implying easing.
Positive
The sentence is classified as positive as it suggests that the inflation rate, which is currently above target, is likely to be temporary and that underlying price pressures will increase only gradually, indicating that inflation will go back down towards target.
“Looking ahead, we will continue to closely monitor the situation in financial markets, as well as the potential implications for the monetary policy stance and for the outlook for price stability.”
ECB press conference, 16 July 2015
Neutral
The sentence is classified as neutral because it merely expresses the ECB’s intention to monitor the situation without providing specific information on inflation or monetary policy implications.
Neutral
The sentence is classified as neutral as it contains no information on inflation risks or economic developments that would justify tighter or looser monetary policy.
1 Classification by MILA, an AI model based on Llama 3.1. The Hawk-O-Meter measures whether communication is indicative of restrictive (hawkish) or accommodative (dovish) monetary policy. Sentiment measures the degree of positivity or negativity of communication.
4 Hawkish or dovish? A Hawk-O-Meter for monetary policy communication
According to MILA, the economic narrative of the ECB Governing Council has been largely dovish since the end of 2011 (see Chart 4.3).The press conferences under Mario Draghi’s presidency (November 2011 to October 2019) are predominantly rated as particularly dovish. This period includes the European sovereign debt crisis, during which the Governing Council judged monetary policy transmission to be impaired and assessed the economic outlook as weak. MILA classifies the economic narrative as especially dovish around the time of Draghi’s “Whatever it takes” statement in 2012. The press conferences during the era of negative key interest rates and other unconventional monetary policy measures as of 2014 are also considered to be very dovish. 32 During this period, the Governing Council stressed the very low and, in some cases, negative inflation rates as well as the elevated risk of these dynamics becoming entrenched. The Governing Council’s press conferences at the start of the COVID-19 pandemic in early 2020, when Christine Lagarde was ECB President, are highly dovish according to MILA. At the time, the ECB Governing Council stressed that the euro area was facing an economic contraction of a magnitude and speed unprecedented in peacetime. 33 Overall, looking at the period from 2011 to 2021, it is particularly striking that the Hawk-O-Meters for inflation and the real economy exhibit strong correlation over large parts. This is consistent with a narrative of prolonged weakness in aggregate demand, associated downward pressure on inflation dynamics, and the need for highly accommodative monetary policy.
The economic narrative turned less dovish in 2021 and was hawkish during the period of monetary policy tightening between 2022 and 2023. MILA finds that the inflation narrative grew less dovish over the course of 2021. At the time, the ECB Governing Council highlighted the elevated rate of inflation, but considered this increase to be transitory. At the beginning of 2022, it revised its assessment in the light of unexpectedly strong rises in inflation rates; as a result, for the first time in around ten years, communication around inflation turned markedly and more persistently hawkish. The Hawk-O-Meter peaked in June 2022, when the Governing Council announced that the next meeting would see a first rise in key interest rates. The inflation narrative remained highly hawkish until the end of 2022, when inflation in the euro area had surpassed the 10% mark. In 2023 and 2024, the inflation narrative gradually turned less hawkish. Most recently, MILA has characterised it as balanced. In contrast to the inflation narrative, the Governing Council’s communication concerning real economic developments remained predominantly dovish or – at most – balanced during this period. This kind of divergence in the narrative between inflation and the real economy indicates that, in the wake of the start of Russia’s war of aggression against Ukraine in February 2022, the ECB Governing Council primarily emphasised supply-side disruptions – with inflationary but growth-damaging effects. The rather dovish communication about the real economy since mid-2023 also reflects the structural weakness in growth in the euro area.
Ahead of the period of monetary policy tightening, the ECB Governing Council’s communication on monetary policy decisions was markedly more dovish than its inflation narrative (see Chart 4.4). The Eurosystem concluded its strategy review in the summer of 2021. 34 On the back of this, the Governing Council modified its communication on the future trajectory of key interest rates, known as forward guidance. It underlined its intention to maintain a persistently accommodative monetary policy stance to achieve the inflation target, even if this might imply “a transitory period in which inflation is moderately above target”. MILA classifies this communication as very dovish. The Governing Council remained markedly dovish in its direct communication on monetary policy decisions afterwards as well, especially in comparison with its inflation narrative. In the March 2022 press conference, the Governing Council stressed that any adjustments to the key interest rates would take place “some time” after the end of net purchases under the APP. In June of that year, the Governing Council then decided to discontinue net asset purchases under the APP and announced its intention to raise interest rates again for the first time at its next meeting. MILA accordingly posts a surge in the Decision Hawk-O-Meter between March and June 2022.
The inflation narrative and key interest rate communication signal the monetary policy stance and telegraph future key interest rate decisions. The monetary policy stance in the euro area (see the supplementary information entitled “Measuring the monetary policy stance”) gradually became less accommodative at the end of 2021 (see Chart 4.4). At that point in time, the deposit facility rate still stood at -0.5%. However, prompted, amongst other things, by the ECB Governing Council’s hawkish communication on the subject of inflation dynamics in its press conferences, market participants priced in a higher likelihood of an impending rise in key interest rates, pushing up longer-term market interest rates. The first key interest rate hike then came in July 2022, half a year after communication had left dovish territory, with the Governing Council raising the deposit facility rate by 50 basis points from -0.5% to 0%. Over the rest of the monetary policy tightening cycle, communication continues to act as an indicator of developments to come: the Hawk-O-Meters for inflation and key interest rates peak around nine months ahead of the final key interest rate increase in September 2023. The reduction in the degree of monetary policy restriction in 2024 through four key interest rate cuts of 25 basis points each was also preceded by less hawkish communication. This makes clear that central banks utilise their communication in press conferences to signal future monetary policy decisions, both via the economic narrative and via the key interest rate path.
Since 2011, the tone of the ECB Executive Board’s monetary policy speeches has evolved in line with the ECB press conferences and the macroeconomic environment in the euro area. MILA finds that the public remarks made by the ECB Executive Board in the period from 2011 to 2021 were likewise predominantly dovish, with a clear pivot towards hawkish speeches at the start of 2022 (see Chart 4.5, left panel). The changes in the Hawk-O-Meter for monetary policy speeches can be attributed to macroeconomic developments in the euro area (see Table 4.2). The rates of inflation and GDP growth have statistically significant effects on the tone of speeches by the ECB Executive Board: on average, the speeches become more hawkish when inflation or growth go up. The estimated coefficients are consistent with a conventional monetary policy rule whereby key interest rates are adjusted more strongly in response to inflation. This also tallies with the ECB’s price stability mandate. The results indicate that monetary policy decision-makers respond to current macroeconomic developments and signal their views with regard to future monetary policy decisions.
Table 4.2: Estimated impact of macroeconomic variables on the Hawk O-Meter for monetary policy speeches by the Executive Board of the ECB
Variable
Hawk-O-Meter1)
(1)
(2)
(3)
(4)
(5)
HICP inflation rate
0.0946***
0.1295***
0.0638***
0.0677***
0.0673***
(0.005)
(0.005)
(0.010)
(0.009)
(0.009)
GDP growth rate
0.0147***
0.0024
0.0121***
0.0109***
0.0092**
(0.004)
(0.003)
(0.005)
(0.004)
(0.004)
Fixed effects
-
Speaker
Year
Speaker, year
Speaker, year, speaker-year
1 Estimated coefficients from a panel regression. The dependent variable is the Hawk-O-Meter for individual monetary policy speeches made by members of the ECB’s Executive Board between November 2011 and August 2024. All members with at least 16 monetary policy speeches are included, yielding a total of 350 observations. Explanatory variables are the inflation rate and GDP growth in the euro area (3-month averages in each case). Specifications (2)-(5) control for year-specific and/or speaker-specific fixed effects. Standard errors are in brackets. Significance levels: *** p < 0.01, ** p < 0.05, * p < 0.1.
5 Positive or negative? A sentiment indicator for monetary policy communication
According to MILA, sentiment in ECB press conferences has been predominantly positive since 2011 (see Chart 4.6, left panel). Following the lowering of the deposit facility rate to 0% in July 2012, MILA records negative sentiment, which persisted until around the end of 2013. This primarily reflects a pessimistic narrative about economic dynamics in the context of the European sovereign debt crisis. By contrast, sentiment was broadly optimistic between 2014 and the end of Mario Draghi’s term as ECB President in November 2019. The subsequent coronavirus pandemic was also reflected in ECB press conferences: while the lockdowns in spring 2020 and winter 2020-21 went hand in hand with negative sentiment, the increasing prevalence of vaccines and the reopening of the economy in 2021 led to optimism. MILA shows a renewed phase of pessimism coinciding with Russia’s war of aggression against Ukraine and the sharp rise in inflation at the beginning of 2022. The ECB press conference in October 2022, in which the sentiment indicator reaches a low, is particularly striking. At that time, financial markets reacted in a highly dovish way, even though the ECB Governing Council raised the key interest rates by 75 basis points and did not change the key interest rate outlook. MILA indicates that this may be attributable to the extremely pessimistic communication. Since the last interest rate hike in September 2023, sentiment has gradually become more positive.
A historical comparison of sentiment and the Hawk-O-Meter regarding the economic narrative shows that the two dimensions should not be considered equivalent (see Chart 4.6, right panel).According to MILA, the economic narrative at the ECB’s press conferences under President Draghi was generally dovish and balanced during the sovereign debt crisis. From the introduction of forward guidance in July 2013, however, communication was dovish and positive until the end of Draghi’s term of office. For 2014 to 2018, in particular, MILA’s assessment indicates satisfactory macroeconomic developments overall, which were supported by the accommodative monetary policy. Three different phases can be identified during President Lagarde’s term of office. A very dovish tone and markedly negative sentiment is recorded for the coronavirus pandemic. Sentiment during the subsequent period of monetary policy tightening from 2022 to 2023 was also negative, but communication was hawkish overall. During the phase of the reduction in the degree of monetary policy restriction that began in 2024, the economic narrative is broadly balanced and slightly dovish. According to MILA, a combination of markedly hawkish and positive communication has only occurred for a short time over the past 14 years, namely during four ECB press conferences in the second half of 2018.
6 Discussion and outlook
Artificial intelligence offers promising opportunities for improving the analysis of monetary policy texts and thus considerably promoting the understanding of the characteristics of monetary policy communication. Using large language models, it is possible to evaluate different monetary policy texts from central banks in an automated and rules-based manner. AI agents based on these models – such as MILA developed by the Bundesbank – also enable a detailed, transparent and multidimensional analysis, which combines the flexibility of human assessments with the consistency of formal methods.
These advances in analysis are faced with challenges. Interpreting and assessing monetary policy statements remains complex and context-dependent. In order to make an accurate assessment, communication must therefore be viewed in the context of the current economic situation, previous statements and the monetary policy stance. The risk of inaccurate assessments via automated systems continues to require careful checking and validation by human experts. In addition, it is essential to continuously adapt the employed models to new technical and linguistic developments as well as economic insights. This is the only way to ensure that AI analysis remains useful and sufficiently precise.
From a central bank perspective, integrating AI into the analysis of monetary policy texts holds the potential of improving central banks’ communication. AI analyses can quantify the characteristics of monetary policy communication in a rules-based manner along various dimensions. Based on the quantitative indicators, it is possible to examine, for instance, the impact of these characteristics on financial market responses directly around the time of the communication. Systematic AI-based analysis thus contributes to a deeper understanding of the perception and impact of monetary policy statements. For example, AI-assisted text analysis can help central banks to improve their own communication. In particular, AI could be used to check in advance whether the tone of communication adequately conveys the intended monetary policy signals. This could help to avoid undesirable market reactions such as occurred in October 2022 (see the section entitled “Positive or negative? A sentiment indicator for monetary policy communication”). Such an improvement could increase the effectiveness and accuracy of one of the most important monetary policy instruments. The increased efficiency and transparency of monetary policy communication resulting from this can ultimately help to strengthen the public’s trust in the central bank, anchor inflation expectations and thus fulfil the primary mandate of price stability.
However, the increasing prevalence of AI analyses among financial market players is also associated with risks. If market participants increasingly use AI to analyse monetary policy statements and predict future decisions, their perceptions and interpretations of central bank communication could become increasingly homogeneous. This would be the case particularly if financial market players used very similar AI models, relied primarily on AI assessment for efficiency reasons and therefore invested less in acquiring additional information. As financial markets provide incentives to anticipate others’ assessments, market participants could increasingly align themselves with the AI-based assessments of other actors. 35 As a result, market participants’ expectation formation process, and thus the price discovery process, would be less efficient and associated with the risk of fragile market sentiment. 36 This could lead to increased volatility if market conditions changed unexpectedly rapidly or if the central bank made an unanticipated decision.
The availability of AI analyses may also make monetary policy communication more challenging for central banks. It may become more difficult for central banks to get their messages through to their target human audience effectively if the latter increasingly use AI for interpretation. If central banks also use AI to shape their communication, a scenario could arise in which machines end up communicating with other machines. This raises concerns about the effectiveness of monetary policy communication and the potential for feedback loops that could amplify market movements or lead to self-fulfilling expectations. 37 It is vital that market participants as well as central banks are aware of these possible implications. A critical examination of AI-assisted analysis is essential to address these risks and ensure that central banks retain control over the impact of their monetary policy communication.
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