ECB Watch: Following in grandmother’s footsteps, the market keeps behind the curve

There are generally clear advance indications of ECB interest rate increases. However, the precise dimensions of change over the longer term are harder to predict, leaving market adjustments trailing.

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%

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