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ECB highlights role of household expectations in monetary policy

ECB officials said expectations about inflation, income, employment, interest rates, and house prices influence spending, saving, investment, borrowing, and wage demands.

Reported · Written up by our desk · Central Banks

European Central Bank officials on Tuesday emphasized that monetary policy depends not only on standard economic indicators but also on what households believe about the future, and how those beliefs shape decisions today.

In remarks focused on expectations research, the ECB noted that expectations about inflation, income, employment, interest rates, and house prices affect consumption, saving, investment, borrowing, and wage demands, which in turn influence the transmission of monetary policy.

The ECB also pointed to the shift in macroeconomic analysis from assuming expectations are rational toward directly measuring them, citing the greater feasibility of high-quality, population-representative surveys using internet and mobile data collection.

As examples, the ECB referenced its Consumer Expectations Survey and recent work by the Bank for International Settlements on expectations formation and how it drives different aggregate economic outcomes across groups and countries.

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