ECB Watch: Decision-makers fly by the seat of their pants
The ECB’s March 2 rate rise is contra-indicated by the prevailing data, which are apparently distrusted by the central bankers. In their view, recovery is well established in eurozone countries.
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%