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A senior European Central Bank executive has said publishing the interest rate forecasts of its policymakers — similar to the US Federal Reserve’s so-called “dot plot” — could help to address shortfalls in its communication and tackle market volatility.
Isabel Schnabel, one of the most influential voices on the ECB’s board, said in a speech on Wednesday that the central bank may benefit from adopting some of the ideas raised by former Fed chair Ben Bernanke in his recent review of the Bank of England’s forecasting processes.
“Some of the points he [Bernanke] raised could also be of relevance to the ECB,” Schnabel said. “One area of reflection relates to whether policymakers’ views on their expected future path of short-term interest rates should be made more transparent, akin to the ‘dot plot’ used by the Federal Reserve System.”
Her comments — the first time an ECB executive has suggested such a shift — show how central bankers are questioning the fundamental way they set monetary policy after widespread criticism they were too slow to react when inflation started to surge in 2021.
Schnabel said it would “come with risks” if central banks returned to the way they operated before the Covid-19 pandemic sowed the seeds of the biggest price surge for a generation.
The standard process of communicating their plans through adjustments to a central inflation forecast “may require a deeper rethink, even if inflation is getting closer to levels consistent with price stability”, she said.
Since their introduction in 2012, the dot plots have become one of the Fed’s most important communications tools, enabling its policymakers to tell markets what they expect to do with interest rates in the coming months.
Bernanke, who launched the dot plot at the Fed, stopped short of recommending the BoE follow suit — despite widespread support for the idea among economists. But he said it “should be on the table” for future debate after presenting the results of his review last week.
The ECB, led by president Christine Lagarde, publishes staff forecasts for the economy based on market expectations of rates but it gives little indication of what its governing council members expect to happen to policy rates in future. An official account of council members’ discussions published four weeks after each policy meeting is anonymised and lacks detail.
Schnabel said publishing the rate forecasts of individual council members “could help signal the risks members of the committee attach to the baseline scenario built by staff”.
She added: “A dot plot can therefore help convey the uncertainty about the future path of the economy and simultaneously provide greater clarity about where policymakers see interest rates moving in the future, potentially working against excessive market volatility.”
The theory behind the dot plot is that laying out the rate path expected by policymakers will enable longer-term borrowing costs to adjust to the Fed’s plans, meaning monetary policy can have more impact on economic conditions.
However, Fed watchers do not always buy the projections. At the start of the year, the dot pots showed US rate-setters expected to cut rates three times over 2024.
Markets, however, priced in six cuts and only adjusted their expectations after data showed the US economy — and inflation — remained stronger than anticipated by either the Fed or investors.
Schnabel said a potential “downside” of publishing rate forecasts is that they could “overly condition market pricing, thereby de facto reducing its informational content”, pointing to research showing they have lowered US long-term yields by 1.3 percentage points over the past decade.
She added the ECB could also consider publishing more details of the views within the council as part of its use of alternative scenarios to illustrate the different paths inflation could take.
