We introduce a novel measure of how European Central Bank (ECB) monetary policy is interpreted by analysts at major investment banks. We construct a “policy interpretation shock” based on the language used in analysts’ reports covering monetary policy decisions by the ECB’s Governing Council (GovC). The main identifying assumption is that changes in the way analysts report on policy communication by the GovC—that is, the change in the policy tone from the preview report to the recap report—reflect unexpected information revealed by the policy event. Using GPT-based sentiment extraction, we show that the tone in these reports closely tracks that of the GovC, often even anticipating shifts in tone. Changes in the policy tone before and after meetings capture how market intermediaries interpret and adjust their assessment of policy decisions. These interpretation shocks are followed by contractionary macroeconomic responses and systematic movements in financial-market prices. These findings underscore the important role of communication in shaping expectations and influencing economic outcomes.
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