ECB governors fear political pressure over Fed-style ‘dot plot’

European Central Bank governors fear publishing their interest rate forecasts would invite pressure from governments trying to gauge if their central banker was serving their domestic agenda, sources told Reuters in a sign an idea to follow the US Federal Reserve’s practice may be hard to sell.

Their concerns highlight the contradictions of the euro zone’s architecture compared with jurisdictions with only one national government, such as Britain and the United States.

ECB board member Isabel Schnabel of Germany last week floated the idea of publishing, as the Fed does four times a year, a “dot plot” of policymakers’ projections about the appropriate path for rates, arguing it would better inform markets.

But conversations with 13 of her colleagues from the euro zone’s 20 national central banks at the International Monetary Fund and World Bank spring meetings in Washington showed nearly all felt such a move would endanger a precious yet fragile independence from national governments.

At the US central bank, the ‘dot’ forecasts are anonymous, which does not stop Fed watchers from trying to figure out which dot belongs to which policymaker. But there is no political pressure on individuals to fiddle with their dots.

For the ECB it would be different. Governors think politicians would try to find out which dot belongs to their country’s central bank chief and pressure that person to express a view that matches their national goals.

Still, a few governors also saw some merit in the proposal or were open to discuss it at the ECB’s next review due to start next year. One source said dots could be clustered so as to conceal individual votes.

An ECB spokesperson declined to comment.

The ECB does try to shield governors from political interference. For example, it does not publish the vote split after policy decisions and the accounts of policy meetings are anonymised and often vague about how many people supported a given view.

COMING REVIEW

The euro zone’s 20 national central banks are statutorily independent from the executive power but most governors still need political support in their home country to get re-elected.

Schnabel, who was expressing her personal views in the speech, also proposed using alternative scenarios in addition to the ECB’s baseline projections. This also received mixed reactions from her colleagues.

Some felt there may be too many possible scenarios – such as, at present, war in the Middle East or a resurgence of US inflation – and these would vary with time.

A 2021 paper by ZEW economists Friedrich Heinemann and Jan Kemper found dovish ECB policymakers who favour lower rates tend to come from high-debt countries and the opposite was true for so-called hawks.

The pattern was more pronounced for the ECB’s 20 national governors than for its six Executive Board members, who are elected via a pan-European political process, the paper found. The board includes President Christine Lagarde and Schnabel herself.

Other central banks are also reviewing the way they operate.

The Bank of England recently received feedback from former Fed chair Ben Bernanke, who urged officials there to overhaul their forecasting regimen.

Bernanke did not recommend that the BoE adopt the dot plot and said that, if it did go down that route, it should produce a single rate projection, as Scandinavian central banks do, rather than individual views.

The Bank of Korea is also considering overhauling how it provides guidance on the likely future path of interest rates by extending the timeframe and giving visual estimates in a bid to boost transparency, sources told Reuters.