Analyzing ECB Communications Improves Forecasting of Interest Rate Decisions

Kerstin Bernoth

DIW Weekly Report, 2025, vol. 15, issue 16/17, 99-105

Abstract: For central banks, official communications serve as essential monetary policy instruments: In press releases, speeches, and interviews, central banks explain their decisions, manage expectations, and promote confidence in their strategy. This Weekly Report analyzes European Central Bank (ECB) communications from January 2019 to March 2025 using a specially trained artificial intelligence (AI) text analysis model. Official ECB statements are evaluated to determine an indicator that categorizes the tone of the communications as restrictive, expansionary, or neutral. The analysis shows that the tone of ECB communications can provide valuable information about future key interest rate decisions. Over the last months, ECB communications have become more neutral in tone, a signal that the ECB is taking a more cautious stance and that the interest rate level currently considered appropriate may soon be reached. An interest rate forecast model that includes inflation, the economic situation, and the tone of ECB communications predicts a further interest rate cut in April 2025 with high probability. However, this is associated with a certain degree of uncertainty, as economic policy events have happened in the past weeks that the model has not yet captured. The current economic uncertainty and planned government investments with a potentially inflationary effect argue for a cautious approach.

Keywords: Monetary Policy; Central Bank Communication; Interest Rates; Multinominal Probit Model (search for similar items in EconPapers)
JEL-codes: E43 E47 E52 E58 (search for similar items in EconPapers)
Date: 2025
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DIW Weekly Report is currently edited by Tomaso Duso, Marcel Fratzscher, Peter Haan, Claudia Kemfert, Alexander Kritikos, Alexander Kriwoluzky, Stefan Liebig, Lukas Menkhoff, Karsten Neuhoff, Carsten Schröder, Katharina Wrohlich and Sabine Fiedler

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