ECB Watch: The lion that squeaked
In the first of a regular series of columns, John Arrowsmith casts light on what at first sight appears to have been a sudden volte-face on interest rates by the European Central Bank.
At the end of the European Central Bank’s monthly monetary policy meeting on November 3 2005 the bank’s president, Jean-Claude Trichet, described the existing policy stance – which had kept the ECB’s key refinancing rate unchanged at 2% since June 2003 – as “appropriate”. Yet at a conference barely two weeks later, on November 18, and again to a committee of the European Parliament on November 21, Trichet publicly declared that he felt the ECB was now ready to raise its interest rates “moderately”. This came about on December 1, when the refinancing rate was raised by a meagre 25 basis points.
What was it that caused the ECB president to give such a clear signal to the markets that rates would rise, so soon after a meeting at which the ECB’s governing council had decided that the existing level of interest rates was still appropriate? If the need for monetary tightening had suddenly become so pressing, why such a modest increase of 25bp, to 2.25%? And what did this imply for the future course of monetary policy and interest rates in the eurozone?
It is now apparent that the governing council had been unable to reach agreement on a rate rise at its November 3 meeting but the debate had been finely balanced.