At last, robots can help us decode what central bankers are really saying - TELEGRAPH UK
BY RUSSELL LYNCH ECONOMICS EDITOR
elling hawks from doves is big business for economists at investment banks who earn their living scouring over every utterance from policymakers.
The most sharp-eyed Kremlinologists can spot a fresh nuance in a speech or a forecast a mile off, to the potential boon of the bank and its clients in bond or currency markets.
Sometimes the central bankers make it easy. For example when Jean Claude Trichet was running the European Central Bank, as soon as traders heard the phrase “strong vigilance” against inflation dropped into a press conference, they knew an interest rate rise was on the way at the next meeting.
But usually it’s a bit trickier, which is why investment banks are delving into artificial intelligence and Natural Language Processing techniques to classify the avian types in Frankfurt or Threadneedle Street.
RBC has just introduced its ECB-O-Meter, an algorithm which sifts through reams of text to boil down all of the central bank’s communication into a dovish or hawkish score, registering 120 types of word and word groups, as well as their prominence.
Phrases such as “upside risk” and “second round effects” – hot-button words for inflation worries – add to the hawk quotient, while words such as “subdued”, “asset purchase”, “deflation” and their roots increase the dove score. More than 1,300 press conferences and speeches from senior officials are analysed.
RBC admits it is not necessarily trying to predict the future, as much as formally quantify what any astute watcher should pick up for themselves. On a scale of +1 (hawkish) to -1 (dovish) the ECB-O-Meter is currently well in negative territory at around -0.5: given the ECB’s throwing of the kitchen sink at the Eurozone economy in September, it’s likely to stay there for the immediate future.
Judged on ECB-O-Meter, Mario Draghi is the biggest dove, scoring lower than -0.4 on average for his speeches over the past two years, followed by the former chief economist Peter Praet. It will be little surprise however that the Bundesbank’s QE-hating Jens Weidmann is at the other end of the spectrum, albeit beaten to the crown of top hawk by France’s Francois Villeroy. New chief Christine Lagarde hasn’t given enough speeches to give a sensible score as yet.
RBC plans to adopt its technique to other central banks, although Bank of America Merrill Lynch has got there first with the Bank of England. Its BoE “Mood Indicator” – applied to 400 publications since 1997, and based on similar NLP principles – detected the most dovish set of minutes for three years.
After two votes for lower interest rates last month, BAML takes it as supporting evidence for its rate cut call in May 2020.
How much use is all this? It may not quite predict policy months ahead, but at least a more scientific analysis can quantify when the rhetoric of the central banks is on the turn, or out of kilter with market expectations, according to RBC. When that happens, sooner or later one of the two will give.