Take my word for it: analysing ECB press-conference textual tone.
The article examines the ECB's communication tone using the Advance Macro ECB Hawk/Dove Score Index. The index highlights a shift from a hawkish stance in early 2021 to mid-2023 to a more dovish tone as inflation pressures eased in late 2023 and early 2024.
Reading time: 4 mins.
In an effort to increase transparency in its monetary policy conduct, ECB's communication has become increasingly informative about the future path of interest rates. As a result, thousands among economists, financial analysts and policy makers closely watch ECB press-conferences and carefully scrutinise the accompanying materials. In this setting, financial markets are constantly on the lookout for signals of hawkish or dovish sentiment, hoping to predict upcoming developments in key ECB rates. In a nutshell, the objective is not only to understand the current move but also to forecast the direction of future monetary policy.
The Advance Macro ECB Hawk/Dove Score Index (press conferences)
The Advance Macro ECB Hawk/Dove Score Index (press conferences) aims to systematically categorize the tone of ECB press conferences as hawkish, dovish, or neutral. Using a pre-trained algorithm that recognizes the tone of sentences, we analyse and categorize each sentence in the introductory statement and the answers given during the Q&A session. These sentences are then aggregated to calculate measures of hawkishness or dovishness for each press conference, specifically for the initial statement and the responses to reporters' questions. A score of "+1" indicates the highest level of hawkish language, while "-1" indicates the highest level of dovish language, with "0" representing a neutral tone.
We analyse these two main segments separately because their tones do not necessarily need to be aligned. In fact, questions from reporters are not scripted and therefore may prompt a different tone in the Q&A session compared to the introductory statement (e.g., see circled observations in Figure 1, below.). Thus, analysing these two sessions separately helps maintain coherence in the analysis.
Tracking historical movements in the ECB Hawk/Dove Index Scores.
From early 2021 to mid-2023, the ECB Hawk/Dove Score showed a sharp increase, reflecting a significant shift towards a more hawkish stance. This period was marked by the gradual lifting of pandemic-related restrictions and the impact of Russia's invasion of Ukraine. The pandemic and conflict led to severe supply bottlenecks and an energy crisis, which in turn contributed to rising inflation. Consequently, the ECB initially adopted more hawkish communication, which later translated into restrictive monetary policy to address these inflationary pressures. This approach was consistent with trends observed in other central banks globally during this time.
Starting from 2023, ECB's language shifted to a less hawkish tone. While the European Central Bank (ECB) continued to raise interest rates to curb high inflation levels, there has been a noticeable change towards a more cautious and data-dependent approach (see for instance ECB's 26-27 July 2023 press-conference). Inflation levels did eventually level-off and started embarking on a downward path toward the 2% objective, see Figure 2 below.
Latest developments in the tone of the AM ECB Hawk/Dove Score Index.
Following encouraging progress on the inflation front, the tone of intro-statements in ECB press conferences has become less hawkish since the beginning of 2023. This shift culminated in a dovish sequence of readings in December 2023, January 2024, and March 2024, as seen in Figure 1. However, at the latest two press conferences, despite a cut in the key ECB rates at the June 2024 meeting, a milder hawkish tone has re-emerged.
This shift reflects the ECB's response to changing economic conditions. As inflation showed signs of easing, the ECB initially adopted a more dovish stance, indicating a potential end to aggressive rate hikes. However, recent statements suggest that the ECB remains cautious and is prepared to reinstate a hawkish tone if necessary to ensure inflation remains under control.
In conclusion, the ECB's tone has shifted in response to evolving inflation dynamics. Lately, the progress in curbing inflation has led to a dovish stance in late 2023 and early 2024. However, recent press conferences have seen a reintroduction of hawkish elements, albeit in a milder form, following a cut in key rates in June 2024. This balanced approach reflects the ECB's cautious optimism, aiming to maintain control over inflation while supporting euro-area economic activity.
The ECB Hawk/Dove Score Index (press-conferences) is part of our Central Bank E-monitor offering. Subscribe to gain valuable insights into ECB communication.
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