By David Barwick – WASHINGTON (Econostream) – European Central Bank Governing Council member José Luis Escrivá on Wednesday said the ECB’s central scenario had tracked recent developments “very closely” over the last six weeks, but cautioned that policymakers could not be sure markets were fully capturing the risk of further supply disruptions or that standard models could reliably estimate the effects of such shocks.

Escrivá, who heads the Banco de España, was responding at the Peterson Institute to questions about which ECB scenario current developments were closest to and how policymakers should deal with the resulting uncertainty.

Had he been asked the same question a few weeks earlier, he said, he probably would have said the euro area was moving away from the central baseline.

Over the last six weeks, however, the central scenario had tracked developments “very closely,” he said, with oil and gas market pricing broadly evolving along the lines embedded in the ECB’s baseline assumptions.

The key question now, according to Escrivá, is whether market prices are a sufficiently good indicator of how events are unfolding or whether possible supply disruptions are still not being fully captured and could yet have a greater impact.

“That is not an easy question to answer,” he said, adding that the issue remained “part of the debate.”

He also said policymakers had to be cautious about the reliability of projections in this environment, because the models they use have difficulty capturing the nonlinear effects that could emerge under more extreme scenarios.

What made the situation especially difficult, he indicated, was that uncertainty concerned not only the external shock itself, but also the ability of existing frameworks to incorporate effects seen in past episodes that do not occur with enough regularity to be modeled with much confidence.

In those circumstances, Escrivá pointed to a policy approach centered on real-time data, cross-checking different models, datasets, and time horizons, and proceeding cautiously rather than drawing premature conclusions that the economy was clearly converging on one scenario or another.