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Banking

ECB Watch: The ECB tries hard not to catch markets on the hop

The governing council appears to be split between raising rates incrementally, at 25bp a time, and the short sharp shock of a 50bp hike.

The European Central Bank’s 25 basis point increase in interest rates at the beginning of August was widely expected. After all, at his monthly press conference four weeks earlier ECB president Jean-Claude Trichet had announced that the governing council would meet in person on August 3 rather than, as had always been the case in previous years during the summer break, by teleconference.

The message was clear and well understood in the financial markets. But was it really necessary to employ such an unorthodox signal and disrupt the holiday plans of the 18 members of the governing council and the cohort of ECB-watching journalists?

If Trichet was so confident that a decision to raise rates would be forthcoming in August, why could the decision not have been taken at the July meeting or announced after a teleconference in August? Could it really not have waited until the following meeting, scheduled for August 31?

The answer is perhaps to be found in a continuing debate in the governing council between those in favour of proceeding cautiously, in 25 basis point steps, and those who favour a more pre-emptive approach, raising rates more rapidly and/or in 50bp steps.

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