Escrivá: Scenarios crucial for monetary policy in uncertain world

Governor José Luis Escrivá highlighted the profound challenges central banks face, particularly in conducting robust monetary policy amidst high uncertainty.

He stressed that "Knightian Uncertainty" makes modal projections unreliable, especially with fat-tailed risks where the balance of risks and asymmetry of policy mistakes become crucial.

Escrivá noted that the current energy shock, exemplified by a 42% oil price change in the Iran war scenario (2026), represents a historical tail event, far exceeding the 5% change seen during the Ukraine conflict (2022).

This environment necessitates a shift towards scenario-based tools for discussion and communication, moving beyond single-point forecasts to better capture the full risk space.

Escrivá detailed the complexities of scenario design, outlining trade-offs between richness and complexity, and openness versus prudence in external communication.

He presented the ECB's March forecast oil price scenarios, including a "Central" scenario based on futures prices, an "Adverse" scenario with a more intense shock, and a "Severe" tail scenario with significantly more intense and persistent impacts.

These scenarios incorporate additional channels like asymmetries and non-linearities at the tails to better reflect agents' reactions.

While policy reactions are analyzed for internal discussions across all scenarios, external communication maintains a "no monetary policy change" assumption beyond technical adjustments.