March 4, 2011
Two things stand out from the European Central Bank's decision effectively to pre-announce a rise in interest rates next month. First is its eagerness to polish up its inflation-fighting credentials after being slurred by Axel Weber and much of the German press and political elite; second is its confidence in the ability of its "non-standard" measures to stop a breakdown of the financial system.
Both may be justified, but the bank's motives may not be of the purest.
The ECB's credibility has been under intense scrutiny in Germany as a result of its response to the crisis. That scrutiny has become even more intense since the decision by Mr. Weber effectively to pull out of the contest to find a successor to Jean-Claude Trichet rather than run for the presidency of an institution that he considered too soft on inflation and too soft on profligate governments.
Mr. Weber's planned departure from the Bundesbank next month has put more pressure on the ECB to be hawkish than they would otherwise have been yesterday, both directly and indirectly.
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