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% between October 2005 and December 2006.
Using coded but clearly understood language, ECB president Jean-Claude Trichet has regularly signalled the likelihood of a rate increase one month or even two or three months ahead. Again this January, he clearly indicated that the ECB was minded to raise rates in March. Market participants have therefore been able quite successfully to anticipate, a month or more ahead, successive moves in official rates.
At the same time, Trichet has always insisted that the ECB was not definitively committing itself to any particular date or any particular amount and that it was not set on a predetermined course towards a target level of interest rates. In consequence, despite the predictability of the ECB’s moves in the near term, markets have been left guessing about what lies further ahead, and in this their record has been much less impressive.