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Germany’s central bank bosses have often accused their Eurozone counterpart of being too aggressive in cutting interest rates, but now the Bundesbank has backed up some of their old arguments with an in-house artificial intelligence tool.
Bundesbank economists used their own AI to screen about 50,000 sentences from European Central Bank monetary policy statements and speeches, tasking Meta’s multilingual large language model to analyse the hawkishness of the bank’s communications since 2011.
The research found the ECB’s tone from that time has been “predominantly dovish”, meaning rate-setters were not overly concerned about inflation risks, stressed economic weaknesses and signalled monetary easing. It said the bank’s policies remained dovish even after it hardened its rhetoric when inflation started to rise in 2021.
Bundesbank’s AI made a striking observation about the tenure of then-ECB president Mario Draghi, including when he pursued historically loose monetary policy during the past decade in an effort to avoid deflation. During that time, ECB communications on wider economic sentiment was noticeably more upbeat than its dovish narrative on inflation and interest rates, the Bundesbank analysis found.
The research can be seen as supportive of arguments made by former Bundesbank bosses such as Axel Weber and Jens Weidmann, who routinely sparred with the ECB. Weidmann publicly said the Eurozone bank had “overshot the mark” with its dramatic monetary easing. Draghi once described the German banker as Mr No, or Nein zu allem.
Draghi, who is credited with saving the euro after he indicated the ECB would do “whatever it takes” to stabilise the common currency, was dubbed “Count Draghila” by the German tabloid Bild, which accused him of “sucking dry” the bank accounts of German savers by imposing negative interest rates.
According to the Bundesbank AI analysis, the ECB’s dovish stance was mostly in line with weak growth and overall adverse economic sentiment — in particular during the European debt crisis, the Covid-19 pandemic and the early days of Russia’s 2022 invasion of Ukraine.
But it spotted a mismatch in the run-up to the 2022 price surge, when inflation shot up to as much as 10.6 per cent: the ECB’s wording on inflation risk became more hawkish from early 2021, but its stance on interest rates remained dovish for almost a full year.
The hawkish tone on inflation risks peaked in June 2022 before the ECB started to finally respond with rapid interest rate increases a month later.
While the Bundesbank has moderated its tone towards the ECB in recent years, the study’s findings could potentially underpin the widespread view among economists that the Eurozone’s central bank waited too long to respond to inflation risks that had long become visible.
“The ECB governing council emphasised the increase in inflation at the time but assessed it was temporary,” the study says.
“The inflation narrative remained highly hawkish until the end of 2022,” the Bundesbank finds, adding that the inflation narrative became “gradually less hawkish” over the past two years and “most recently” has been balanced.
The ECB declined to comment on the findings.
Source: Economy - ft.com
