From December 2005 to December 2006 the European Central Bank raised its key interest rates in six 0.25 percentage point steps, taking its main refinancing rate from 2% to 3.5%, and triggering a corresponding increase in short-term euro money market rates. After allowing for inflation, which subsided in the closing months of 2006, short rates in real terms rose by just over two percentage points, taking the real rate on one-month deposits from –0.4% to +1.7% between October 2005 and December 2006.
Using coded but clearly understood language, ECB president Jean-Claude Trichet has regularly signalled the likelihood of a rate increase one month or even two or three months ahead. Again this January, he clearly indicated that the ECB was minded to raise rates in March. Market...
