Hawkish or Dovish? Analyzing ECB Executive Speeches for Policy Signals.
The article analyses ECB Executive Members' speeches outside Governing Council press-conferences to gauge their monetary policy stance.
Reading time: 3 mins.
Policy analysts, economists, and financial market practitioners routinely scrutinize ECB communication to gauge the likely future path of policy rates. In fact, central bankers are known for periodically dropping "hints" regarding their expectations of economic developments, including trajectories of economic activity or future inflation.
In this short article, we focus on the communication of ECB Executive Members outside of Governing Council meetings and its implications for upcoming monetary policy developments. Specifically, we scrutinize the text of their speeches and classify each sentence as neutral, hawkish, or dovish. This classification is performed using a pre-trained algorithm that identifies the tone of each sentence and labels it accordingly.
For instance, the sentence: "The lowering of perceived inflation risk is plausibly connected to the faster-than-expected decline in inflation in recent months, which has provided reassurance that inflation would not remain too far away from target for too long." is labelled as a dovish statement.
We then aggregate all sentence labels to determine the overall sentiment of each speech, categorizing it as overall neutral, hawkish, or dovish. The result is a time series of measures reflecting the hawkishness or dovishness of the tone in speeches given by members of the ECB Executive Board, see Figure 1.
Reading and interpreting the index scores.
How do we read the ECB Hawk/Dove Speeches Index Scores? From Figure 1, a reading above zero signals a hawkish stance, while a reading below zero indicates a dovish sentiment (see yellow line). A reading close to zero translates to a neutral stance. Given that individual speech scores might be a noisy signal of the underlying hawkish/dovish stance, we also construct a smoothed measure that uses the moving average of the previous 36 speeches (dashed black line). This makes it easier to identify the underlying trend in the tone of the speeches.
A quick glance at historical patterns.
Over the last 14 years, the gradual rise in index scores from late 2020 to early 2021 until late 2022 is particularly striking, suggesting that the views of Executive Members were becoming increasingly hawkish. During this period, members of the Executive Committee were clearly commenting on the increasing inflationary pressures stemming first from supply bottlenecks and subsequently from broader supply shocks (Russia-Ukraine conflict). These factors were the primary sources of the inflation surge in the post-pandemic period, leading to tighter monetary policy. Unsurprisingly, this hawkish sentiment translated into actual hikes in key policy rates at subsequent ECB Governing Council meetings.
Most recent developments.
Lately, the score index has become increasingly dovish, perhaps reflecting views of easing monetary policy. For instance, in a recent speech Executive Member Philip Lane outlined that despite "bumpy", the Euro-Area HICP was making progresses and that the Euro Area had finally embarked on a dis-inflationary path.
Conclusions
Analysing ECB Executive Members' speeches outside of Governing Council meetings can give useful insights on their monetary policy stance. By classifying each sentence as neutral, hawkish, or dovish, we create a time series reflecting the overall sentiment. This speech analysis helps anticipate future policy moves based on the evolving tone of ECB communications.
The ECB Hawk/Dove Score Index is part of our Central Bank E-monitor offering. Subscribe to gain valuable insights into ECB communication.
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Disclaimer: The information contained in this article is for informational purposes only and should not be construed as investment advice, financial guidance, or a recommendation to buy or sell any financial instruments. This article does not take into account any specific investment objectives, financial situation, or particular needs of any individual. Before making any investment decisions, you should seek advice from a qualified financial advisor who can take into account your individual circumstances. The authors and publishers of this material expressly disclaim any liability for any loss arising from any reliance on the information provided herein