A new study reveals that artificial intelligence can significantly improve forecasting accuracy for European Central Bank policy decisions, providing a technological edge in predicting monetary moves. By analyzing ECB communications through specialized text analysis, researchers have developed a model that extracts valuable signals from central bank language, demonstrating how AI can decode the carefully crafted messaging that shapes financial markets.
The big picture: AI text analysis models can boost the accuracy of ECB interest rate prediction from 70% to 80%, according to research from the German Institute for Economic Research DIW Berlin.
How it works: Researchers created a specialized AI model that examines each sentence in ECB statements to identify signals for restrictive, expansionary, or neutral monetary policy.
- The model analyzed ECB communications spanning from January 2019 to March 2025.
- When combined with traditional economic indicators like inflation data, policy uncertainty measures, and previous interest rate patterns, the AI-enhanced approach significantly improved forecasting performance.
What they’re saying: “Central banks use language as a monetary policy instrument,” said Kerstin Bernoth, the study’s author.
- “The choice of words in speeches, press releases or interviews is never random, but carefully considered and allows conclusions to be drawn about the future direction of monetary policy.”
Reading between the lines: The research highlights how central banks have evolved to use communication strategically, making their language a critical tool for market guidance that can be systematically decoded with AI.
Where we go from here: The forecast model signals a high probability of another interest rate cut at the upcoming ECB meeting despite recent more neutral tone from the central bank.
- Analysts surveyed by Reuters expect the ECB to reduce its key interest rate from 2.5% to 2.25% as tariffs impact trade and uncertainty affects consumption and investment.
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