In March the European Central Bank raised interest rates by 25 basis points for the second time in four months. The move, taking the ECB’s main refinancing rate to 2.5%, had been clearly prefigured weeks in advance, like the December 2005 rise, by the smoke signals issuing from Frankfurt’s Eurotower. Yet at the time of the governing council’s March 2 decision, again as in December, there was little hard evidence to be extracted from the available economic data that warranted a further tightening of the monetary screw.
It was far from clear that a sustained economic recovery, reigniting demand pressures, was under way: real GDP growth was provisionally estimated to have slowed in the fourth quarter of 2005 from 0.6% to 0.3%, falling short of even a conservative estimate of potential output growth. Monthly figures for retail sales and industrial output were showing a similar picture. And headline inflation was still trotting along outside the range that the ECB regards as compatible with its medium-term price stability objective but showing no sign of breaking into a gallop. Indeed core inflation, from which energy and unprocessed food prices are excluded, continued ambling along – as did non-energy producer prices – at a mere 1.3%