ECB’s Schnabel: Need to Evaluate Role of Forecasts in Uncertain Environments

17 April 2024

By Isabel Teles – WASHINGTON (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Wednesday said that under conditions of volatility, the role of economic forecasts needed to be reassessed by central banks.

Speaking at the US Federal Reserve Board on the margins of the spring meetings of the International Monetary Fund and World Bank, Schnabel said, ‘[T]he question is whether we should give the baseline projections a weight in policy calibration and communication, so that deviations of projected medium-term inflation from the target would almost mechanically trigger expectations of policy adjustments.’

A policy framework that relied strongly on a central inflation forecast was risky, she said, and required ‘a deeper re-think, even if inflation is getting closer to levels consistent with price stability.’

‘As part of this re-think, central banks will need to carefully evaluate the role the central forecast should play in an environment characterised by higher macroeconomic volatility and persistent supply-side shocks, and how projections could be made more robust in order to place policymaking on a firmer footing, while allowing for clear and transparent communication about the inherent uncertainty’, she said.

It was prudent to consider the baseline forecast as ‘just one input’ into policy decisions, she said.

Forecasts of models estimated on historical time series could result in mean reversions, she said, which could ultimately make monetary policy procyclical.

‘Consequently, there is a risk that policymakers react too late when the economy is hit by a more persistent inflation shock, and that policy is loosened too early when inflation falls again’, she said. ‘In other words, mean reversion introduces an easing bias during inflation shocks and a tightening bias during disinflation shocks.’