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Christine Lagarde has said the European Central Bank must do more to explain why its forecasts are sometimes wrong and accept the limitations in its ability to predict the future or risk a further erosion of public trust.
The ECB president warned it would be hard for central banks to rebuild confidence after they were forced to rip up their forecasts for how inflation and growth would be affected by recent economic shocks, including the coronavirus pandemic and Russia’s full-scale invasion of Ukraine.
“To rebuild confidence in expert institutions, we need to do a better job of conveying the uncertainty we face and the inherent challenge in conducting forward-looking policymaking in this environment,” Lagarde told an event in London. “Humility in how we communicate is key to fostering trust.”
Since eurozone inflation surged to a record high of 10.6 per cent last year, more than five times the ECB’s target, Lagarde and her fellow rate-setters have put more emphasis on past inflation figures than its forecasts to decide monetary policy.
Central banks faced “both a challenge and an opportunity” to persuade consumers and businesses that the recent high levels of inflation will not continue into the future, she said in a speech to the European Economics and Financial Centre on Monday.
Core inflation, which excludes energy and food to give a clearer idea of the build-up of price pressures, fell in August to 5.3 per cent. But that remains close to its recent record high and the ECB has said it wants to see signs of a sustainable fall in underlying inflation towards its target before it stops raising interest rates.
Lagarde’s comments came as the ECB prepared for its most finely balanced policy meeting in several years next week, with policymakers voicing diverging views on whether to raise its deposit rate for a 10th consecutive time, from the current level of 3.75 per cent, or pause in a bid to avert the increasing risk of recession.
The ECB president gave little sign of which way she was leaning. But she presented two key reasons why there was an “urgent” need to “seize the moment in communicating more effectively: high inflation and high levels of attention on inflation”.
The growth of social media and online news had made it “increasingly challenging” for central banks “to disseminate factual information”, she said, pointing to research finding false news spread about 10 to 20 times faster than facts on social media platform X, formerly Twitter.
The ECB, like other major central banks, consistently underestimated how high inflation would rise as Europe’s economy reopened after the lifting of pandemic lockdowns and as Russia’s invasion of Ukraine sent energy and food prices soaring to record levels.
“Even if these [forecast] errors were to deplete trust, we can mitigate this if we talk about forecasts in a way that is both more contingent and more accessible, and if we provide better explanations for those errors,” Lagarde said.
As well as explaining its mistakes, she said the ECB had changed its forecasting process, such as by outlining a scenario analysis after both the pandemic and the Ukraine war and presenting sensitivity analyses on energy prices and wages.
Under Lagarde, the ECB has also sought to use less technical language and to reach a wider audience beyond financial market specialists.
The latest EU survey of citizens in May and June found that 40 per cent said they did not trust the ECB — an increase of 2 percentage points from earlier this year, but below the 46 per cent who said they did trust it.
Lagarde said public confidence had been eroded by the recent high level of inflation, but the ECB needed to be “open about the limits of what we know, the areas where we have missed the mark, and what we are doing about it”.