Bundesbank uses AI to analyze ECB's dovish policies

Germany's central bank, the Bundesbank, is using artificial intelligence to analyze the European Central Bank's (ECB) monetary policy. This new analysis highlights a long-standing belief that the ECB has been too lenient in its approach to interest rates. Bundesbank economists employed an AI tool to review around 50,000 sentences from ECB statements and speeches since 2011. They discovered that the ECB's communication has often had a "dovish" tone, meaning it did not show much concern for inflation. Instead, it focused on economic weaknesses and implied support for easier monetary policies. The study indicated that even during rising inflation in 2021, the ECB maintained a dovish stance. It contrasts with the more confident messaging from the ECB under Mario Draghi, who led the bank during a time of historically low rates to combat deflation. Critics in Germany have argued that this policy hurt German savers. The Bundesbank's findings echo criticisms from former Bundesbank leaders who frequently challenged the ECB's decisions. They believe the ECB was too aggressive in its monetary easing policies. The AI analysis also noted that the ECB’s communications during significant crises, like the European debt crisis and the COVID-19 pandemic, supported a dovish stance. However, there was a gap between the ECB's acknowledgement of rising inflation risks and its delayed response in raising interest rates. The bank's hawkish language on inflation only peaked shortly before it started to increase rates in 2022. Despite some changes in tone from the Bundesbank regarding the ECB, these findings suggest many economists still feel the ECB was slow to react to inflation concerns. The ECB has not commented on this analysis.