Philip R. Lane: The science and practice of monetary policy communication: the ECB experience

Keynote speech by Philip R. Lane, Member of the Executive Board of the ECB, at the Bank of England and its Watchers Conference

London, 10 November 2026

Monetary policy is about more than just the latest interest rate decision. It also involves communication about future economic developments and the factors shaping future policy decisions.^[1] By steering the expectations of financial market participants, central bank communication shapes the full set of financial market prices across the maturity and risk spectrums, in turn affecting financing conditions and decisions around credit, saving and investment. The decisions of households and firms are also affected by their beliefs about monetary policy, which depend on how the central bank communicates.^[2]

I will divide this speech into two parts. In the first part, I will review recent contributions by ECB staff on the science of monetary policy communication.^[3] In the second part, I will discuss the practice of monetary policy communication from an ECB perspective.

The science of monetary policy communication

Greater data availability, increased computing power and artificial intelligence have substantially expanded the tools available for analysing central bank communication. Until recently, researchers relied on dictionary-based approaches to quantify the content and tone of monetary policy statements and speeches. This involved categorising specific words and expressions associated with a restrictive or accommodative stance, or with different assessments of inflation and the economic outlook.^[4] Machine learning techniques and large language models (LLMs) now allow for the extensive analysis of large volumes of text in a more automated manner, taking into account the context in which words are used instead of relying solely on the frequency of individual words or predefined expressions.^[5]

Recent ECB research illustrates these possibilities. A set of novel, LLM-based in-house measures of the tone of ECB monetary policy communication confirms that it becomes more hawkish during tightening phases and more dovish during easing periods. These shifts in communication closely track developments in the deposit facility rate (Chart 1, panel a).^[6] The importance of communication is also illustrated by the research finding that information extracted from ECB monetary policy statements can improve forecasts of euro area core inflation several quarters ahead, even when controlling for the contributions of Eurosystem and ECB staff projections.^[7]

These indicators can also be employed to test whether central bank communication follows systematic patterns that reflect the economic outlook and the policy stance. Indeed, the evidence suggests that central banks tend to communicate in a systematic manner, following “communication rules”.^[8] By estimating a systematic relationship between the tone of communication on monetary policy, economic activity and inflation, ECB staff find that, in line with our primary objective of price stability, ECB communication on monetary policy systematically places more emphasis on inflation developments (Chart 1, panel b).

These new tools therefore provide valuable insights into aspects of communication that conventional financial market indicators may not fully capture. At the same time, their use requires careful validation, since the results depend on how questions are formulated and what data are used for training.^[9]

Chart 1

Evolution of ECB communication tone and “Taylor-type” communication rule weights

a) LLM-based sentiment scores and the deposit facility rate (DFR)	b) estimated communication rules linking tone on monetary policy with tone on inflation and economic activity
(left-hand side: scoring points (neutral is 0, hawkish is above 0, dovish is below 0); right-hand side: deposit facility rate (percentages))	(standardised regression coefficients)

Financial markets

Financial market participants closely follow central bank communication because it provides information about both the economic and inflation outlook and the expected path of monetary policy. Both of these dimensions are relevant for asset pricing and investment decisions.

Central bank communication can influence interest rate expectations and financial conditions, independently from actual policy changes.^[10] Research shows that financial analysts reassess the monetary policy stance following ECB Governing Council announcements, considering both the policy decision and the accompanying communication. Unexpected revisions in their assessment contain information beyond conventional market-based monetary policy surprises and are associated with significant effects on economic and financial conditions. For instance, even when an interest rate decision is widely anticipated and generates little immediate market reaction, the accompanying communication may lead market analysts to reassess how restrictive is monetary policy or how it is likely to evolve.^[11]

Chart 2

Communication moves financial markets

Cumulated absolute high-frequency changes in risk-free rates by event type

(basis points)

The importance of communication extends beyond Governing Council meetings. Research examining thousands of speeches, interviews, hearings and other events shows that communication in the time period between meetings can affect market interest rates across maturities. It can help markets anticipate policy changes, particularly ahead of tightening episodes, and its cumulative effect over time can be comparable to that of policy announcements, especially at longer maturities (Chart 2).^[12]

Beyond shaping expectations about the future path of policy rates, communication also affects financial conditions more broadly. The tone of ECB communication can influence monetary policy uncertainty and premia on risky assets.^[13] In particular, financial markets respond to several dimensions of monetary policy news: the current policy rate, the expected path of rates, and market and sovereign risk (“target”, “path”, and “risk” in Chart 3, respectively).

Chart 3

Monetary policy news from selected ECB Governing Council meetings

(standard deviations)

Households and firms

Communicating with households and firms presents different challenges to communicating with markets. Unlike professional market participants, most households do not closely follow central bank communication. And even when they do encounter central bank messages, they may interpret their implications differently to market analysts. Research presented in our 2021 monetary policy strategy review suggests that information about the new inflation target reached only around one in ten consumers in the months following its announcement. Most learned about the new inflation target through television, radio and newspapers rather than directly from the ECB (Chart 4).^[14]

Chart 4

How ECB communication reaches households

Consumer Expectations Survey responses on channels for information about ECB

(percentage shares of all respondents)

Reaching households, however, is just one part of the process. Attention to inflation varies with the economic environment. When inflation is high, households and firms tend to pay more attention, while they pay less attention when inflation is low and stable (Chart 5).^[15] This matters for the transmission of monetary policy. What households and firms believe about future inflation, and how confident they are that the central bank will deliver price stability, shapes how they set wages and prices and how they adjust their spending and saving when we change interest rates.^[16]

When inflation is high, households tend to be more attentive, but they may also be less responsive to information they already know. This underscores the importance of tailoring communication to the economic environment to ensure that messages reach households when inflation is low while providing clear, relevant and informative explanations when inflation becomes more salient.^[17]

Households typically interpret monetary policy in terms of how it directly affects their economic circumstances. Euro area consumers tend to associate monetary policy primarily with borrowing costs rather than directly with inflation. Those who emphasise the borrowing-cost channel may also respond more strongly to a rate rise in their planned spending decisions.^[18]

The expectations of firms are also important for monetary policy transmission. Their views about future inflation influence pricing, wage-setting and investment decisions, and ultimately the evolution of inflation itself. Recent evidence shows that attention paid by firms to inflation varies considerably over time, increasing when inflationary pressures become more pronounced (Chart 5, panel b).

Chart 5

Inflation attention of households and firms

a) Household inflation attention, perceptions and expectations	b) Firms’ attention to inflation and inflation risks
(index of relative number of articles (left scale); annual percentage changes (right scale))	(cross-sectional average of sentences mentioning inflation keywords, three-month moving average)

Macroeconomic impact of monetary policy communication

Unexpected shifts in monetary policy communication (“communication shocks”) can influence activity and inflation. Relative to the impact of those of unexpected interest rate decisions (“interest rate shocks”), the effects of “communication shocks” tend to be smaller and slower to materialise but can nevertheless be significant (Chart 6).^[19]

Chart 6

Euro area macroeconomic effects of ECB communication and interest rate shocks

Impulse responses to interest rate and large language model based ECB communication shocks

(percentage)

It is also important to recognise that monetary policy announcements convey different types of information. Markets respond not only to the decision, but also to what it reveals about the assessment of the economy. A surprise rate rise may signal tighter policy, but it may also lead markets to reassess the strength of activity or the persistence of inflation. Research has developed methods to separate policy surprises from the so-called central bank information effects, and more recently from surprises about how the central bank responds to publicly available news. These distinctions are important in order to assess accurately the effects of monetary policy communication.^[20] Recent research shows that these channels are distinct and can be identified together, which sharpens estimates of how policy affects the economy.^[21]

For the ECB, research finds that estimated monetary policy surprises on meeting days – the movements in interest rates in a narrow window around the announcement – are partially inferable from euro area equity market changes over the six weeks preceding the meeting.^[22] Market reactions to speeches, by contrast, show no such pattern.^[23] Information conveyed by ECB announcements also travels across borders. The evidence suggests that it accounts for an important part of the co-movement of German and US government bond yields around ECB announcement days.^[24]

ECB staff have also analysed the implications of uncertainty for monetary policy communication. When economic conditions are changing rapidly, it may be preferable to place greater emphasis on the current state of the economy than on precise indications about the distant future.^[25] The appropriate degree of precision also depends on how confident policymakers are in their forecasts and how that confidence is perceived.^[26] Moreover, how policymakers express confidence in their assessment – or acknowledge developments that differ from expectations – can itself be informative about the policy stance.^[27]

Trust and credibility

Finally, economic agents need to not only clearly understand central bank messages but also trust that the words will be followed by action. Explaining why the ECB’s inflation target matters for economic stability can strengthen public confidence in our commitment to keep prices stable. Such explanations are particularly effective among people with lower financial literacy, as they can help them understand how monetary policy contributes to achieving the inflation target. The effects can persist for several months but tend to fade over time.^[28] Building and maintaining credibility therefore requires more than communicating individual decisions clearly. It requires explaining, consistently and repeatedly, why our objective matters and how our policies contribute to achieving it.^[29]

The practice of monetary policy communication

Having reviewed recent scientific research on monetary policy communication in the first part of this speech, I will now turn to a discussion of monetary policy communication in practice.

Throughout its history, the ECB has adapted its communication content to changes in the economy, the instruments activated in setting the monetary policy stance and the nature of the uncertainty facing policymakers (Chart 7).

Chart 7

Evolution of topics discussed in ECB communication

(percentage share of topic prevalence)

Before the global financial crisis, ECB monetary policy communication focused on explaining decisions and making the underlying reaction function more predictable, without explicitly signalling an interest rate path.^[30] Since its inception, the ECB has held press conferences to accompany its policy decisions. The publication of staff macroeconomic projections from 2004 onwards provided further information about the outlook. Policy decisions were systematically related to the assessment of risks surrounding the projected inflation path, while communication between meetings could help markets anticipate turning points. For instance, the speech by ECB President Trichet on 18 November 2005 ahead of the December 2005 interest rate increase helped prepare markets for the first interest rate increase in five years.^[31] Through these steps, news about the orientation of monetary policy influenced medium- and longer-term yields even before the era of explicit forward guidance.^[32]

The global financial crisis and the euro area sovereign debt crisis fundamentally changed the environment. Amid severe financial stress, effective communication played an essential role in restoring confidence and supporting smooth monetary policy transmission. This was particularly evident in the summer of 2012 due to rising financial fragmentation and elevated sovereign risk premia. The ECB's commitment to do “whatever it takes” to preserve the euro, followed by the announcement of the Outright Monetary Transactions (OMT) instrument, helped alleviate these concerns and contributed to a substantial decline in sovereign bond yields and narrowing spreads in the countries most affected by the crisis. This episode illustrates how communication backed by a clear policy commitment can safeguard smooth monetary policy transmission.^[33]

As policy rates approached the effective lower bound, influencing expectations about future rates became all the more important. The ECB introduced explicit rate forward guidance in July 2013. By communicating on the future policy path, rate forward guidance sought to influence market expectations and financing conditions beyond the immediate policy horizon. Experience showed that design matters. Longer-horizon and state-contingent guidance can reduce uncertainty about future rates by clarifying the conditions under which policy may change.

By contrast, short-horizon or open-ended guidance may be less effective and can even increase uncertainty if it leaves markets unsure about the central bank's future course of action.^[34] The interaction with other instruments matters as well. Asset purchases can reinforce the effectiveness of forward guidance, while clear information about the scale of purchase programmes can reduce uncertainty. However, linking the sequencing of asset purchases to interest rate decisions can also constrain policy flexibility when economic conditions change unexpectedly.

As a result of the 2021 monetary policy strategy review, the Governing Council adopted the symmetric two per cent inflation target. At the following monetary policy meeting (July 2021), it revised its rate forward guidance by linking the expected policy path more explicitly to the inflation outlook and realised progress in underlying inflation. This reinforced the commitment to a forceful or persistent monetary policy response aimed at achieving the inflation target when inflation appeared at risk of undershooting the target.^{[35] [36]}

However, in the wake of the 2021-2022 inflation surge, the guidance that had been designed specifically for an environment of persistently below-target inflation was no longer appropriate. The period between July 2022 and March 2023 constituted an important transition phase. In July 2022 the Governing Council moved away from the effective lower bound by raising the policy rate from minus 50 basis points to zero.^[37] In line with the 2021 strategy decision that the ECB key interest rates are the primary monetary policy instrument away from the effective lower bound, the monetary policy statement did not provide specific guidance on the expected future rate path. However, it did provide directional guidance, indicating that further rate normalisation would be appropriate at upcoming meetings, even if the exact calibration would be data-dependent and decided on a meeting-by-meeting basis. The following four meetings (September 2022 to February 2023) maintained directional guidance, with a pair of 75 basis point hikes followed by a pair of 50 basis point hikes.

In addition, the February 2023 meeting articulated the intention to also hike by 50 basis points at the March meeting, which was subsequently implemented. However, having quickly raised the policy rate from -50 to 300 between July 2022 and March 2023, the March 2023 monetary policy statement replaced directional guidance with the reaction function guidance that future interest rate decisions would be based on the inflation outlook in light of incoming economic and financial data, underlying inflation dynamics and the strength of monetary policy transmission. These criteria would be assessed on a data-dependent, meeting-by-meeting basis. These elements of the reaction function remain in place. An explicit role for the risks surrounding the inflation outlook was added in July 2025: this reflected one implementation of the conclusion of the 2025 monetary policy strategy assessment that monetary policy decisions should explicitly incorporate this risk assessment.

Although it turned out that the following four meetings would also deliver hikes (25 basis points at each meeting, bringing the policy rate to 400 basis points), there was a clear gear shift at the March 2023 meeting. In essence, after a series of rapid and outsized hikes, the gap between the policy rate and the plausible range of the “appropriate level” of the policy rate was no longer so wide as to justify ongoing formal directional guidance.^[38] While formal directional guidance may be appropriate in the early phases of a forceful monetary policy response to a large inflation shock in either direction, it may convey an excessive level of certainty about the future rate path in the later phases (after a large adjustment has already been put in place). Similarly, avoiding formal directional guidance is prudent in implementing a measured monetary policy response to less extreme inflation shocks.^[39]

The framework guidance provided by the Governing Council can be interpreted as implementing the strategic approach to making monetary policy decisions that was laid out in the 2021 monetary policy strategy statement.^[40] In particular, the 2021 strategy committed to basing monetary policy decisions on an integrated assessment of all relevant factors, taking into account the interdependencies between the economic analysis of real and nominal variables and the monetary and financial analysis that focused on the monetary transmission mechanism.

Since it would be unwise to rely exclusively on inflation projections, especially during times of high uncertainty, a balanced approach that takes into account both the forward-looking inflation outlook and the information revealed by the realised path of underlying inflation is preferable, with underlying inflation indicators distilling the realised inflation data to uncover the components most relevant for the medium term. In calibrating monetary policy, it is also essential to rely on the latest assessment of the strength of monetary transmission, given the range of uncertainty about the timing and strength of the macro-financial impact of shifts in the monetary policy stance and the scope for exogenous shocks to financial conditions and financing conditions.^[41]

Framework guidance delivers a systematic approach to monetary policy that is interpretable by financial market participants and external experts. The 2021 monetary policy strategy statement highlighted that monetary policy decisions are communicated through the monetary policy statement, the press conference, the Economic Bulletin and the monetary policy accounts. Together with the publication of the quarterly staff macroeconomic projections exercises, these releases provide the analytical underpinnings of how the reaction function criteria are assessed. Further analysis is provided through staff working papers and contributions to the ECB Blog, along with presentations and speeches by ECB Executive Board members.^[42]

Recent ECB research shows that the sensitivity of rate expectations to macroeconomic news appears to have increased under the ECB’s current framework guidance regime compared with the period of explicit forward guidance, where short-term rates were mostly constrained by an effective lower bound, implying a smaller information content of surprises for the expected policy path (Chart 8). Markets seem to have incorporated macroeconomic news in rate expectations in a systematic manner only after the explicit formulation of the reaction function criteria, which also came at a time of receding macroeconomic uncertainty. That said, the evidence is suggestive rather than conclusive: the economic environment, the degree of uncertainty and the constraints facing monetary policy also changed substantially between those periods. Nevertheless, it highlights how communication frameworks can influence expectations and the transmission of monetary policy.

Chart 8

Response of OIS rates to euro area macroeconomic surprises, by communication regime

(basis points per standard-deviation surprise)

Finally, incorporating uncertainty into monetary policy communication poses trade-offs.^[43] In view of the high level of external trust in the systematic and comprehensive analysis that underpin the exercise, the information anchor provided by the baseline projections is more valuable than ever in an environment of elevated uncertainty. At the same time, in relation to specific and material risk events, the publication of alternative scenarios can help financial markets, experts and the public understand the possible quantitative impact on inflation and growth dynamics if these alternative scenarios were to materialise.^[44]

A communication risk is that excessive focus in placed on the published scenarios rather than also taking into account the comprehensive risk assessment that is contained in each monetary policy statement and expanded upon in the accounts. During any period, a range of risk factors can materialise, such that a wide-angled perspective is needed, rather than taking a reductive approach that overly focuses on any particular set of scenarios.^[45]

Conclusions

In this speech, I have outlined some recent ECB research on the science of monetary policy communication. In particular, I have highlighted that new text-based tools, including large language models, allow us to measure central bank communication more systematically, and these confirm that what we say moves financial markets, between meetings as well as on meeting days. Relative to markets-orientated communication, reaching households and firms is more challenging: their attention to inflation rises and falls with inflation itself, which makes clear and consistent communication even more important when inflation is elevated.

In relation to the practice of monetary policy communication, framework guidance is more effective than rate forward guidance when policy rates are away from the effective lower bound. In particular, framework guidance retains the beneficial properties of forward guidance in providing an anchor for rate expectations without incurring the costs in terms of inflexibility and the risk of misperceptions. By communicating a reaction function that spells out the criteria that guide our decisions, our framework guidance has helped markets interpret the incoming data.