The ECB's recent decision not to cut interest rates may not have been as unanimous as ECB president Mr Wim Duisenberg tried to portray at the press conference afterwards.
For his own part, Mr Duisenberg has been increasingly stressing that rates will not be reduced. His steadfast insistence culminated in extremely bullish remarks at the press conference before Easter. Yet the markets virtually ignored his remarks until it was too late. Many analysts have now revised their expectations, predicting a rate cut in June, or possibly not at all. The markets difficulty in reading the signs, may be attributed partly to Mr Duisenberg's legendary PR skills. It could also be that many analysts believed there was powerful resistance to his policy within the ECB council and that these adversaries would win out.
For now, Mr Duisenberg has won the battle. Anyone who did not listen to him before will certainly be listening now. Before the last meeting, ECB watchers had said senior council members' attitude to a rate change was too close to call. The French deputy president Mr Christian Noyer and possibly even the chief economist Mr Otmar Issing were thought to be in favour of a pre-emptive cut.
However, it appears that there were several reasons why rates were left unchanged. Mr Duisenberg insists the inflation rate is far more important than growth rates. At 2.5 per cent, inflation is still well above the ECB's 2 per cent target, and thus a rate cut could not be justified. In addition, while he is focused to some extent on slower growth, there is a simultaneous message that the downturn should not be exaggerated. It seems the view is that rate cuts would be welcome, but are not a necessity.
The counter-argument is that inflation risks are decelerating and there is now room for a preemptive cut. Irish officials were probably not unhappy with no change, but politically a rate cut could be just what Finance Minister Mr McCreevy wants. A rate cut would be good news for inflation, which is remaining stubbornly high. It would bring down mortgage rates and, if it boosted the euro, it would also mute inflationary impulses from abroad. With the economy appearing set to slow rapidly this year, it could also provide a welcome boost to consumer confidence.
As Mr Oliver Mangan of AIB has pointed out, the US has experienced price stability for the past decade but inflation has not been under 2 per cent. Thus he argues that there is a fundamental flaw at the heart of the ECB's interest-rate-setting strategy, which ought to be addressed.
But perhaps the real problem was the pressure coming from the euro group of finance ministers. The group had called for a rate cut and its official spokesman, Belgium's Mr Didier Reynder, had even called for a rate reduction at the European Parliament. Mr Reynder also attended the ECB meeting. As one observer noted, there were no circumstances where the central bankers would see a politician calling publicly for a rate cut, attending their meeting and then delivering it. The charges of political interference that could result would be anathema to them.
It may thus be in the politicians' best interest to refrain, at least publicly, from commenting on interest rate policy. Even the new US treasury secretary, Mr Paul O'Neill, has learnt the difficult lesson that no interference is generally best from the markets point of view.
However, it is still likely that, even without the interference factor, the meeting could have decided to leave rates unchanged. There have been ongoing problems of message control, with Mr Duisenberg arguing that he must be in control. It is believed that he has won this battle; nevertheless, ongoing questions about his leadership would have made him more likely to be insistent about his position. Under an informal agreement cobbled together just before he took office, Mr Duisenberg is meant to stand down after euro notes and coins are introduced next year. He is to be replaced by France's Mr Jean Claude Trichet. However, Mr Trichet is facing his own difficulties because of the ongoing investigation into Credit Lyonnais. As a result, another name has emerged - that of Mr Jean Lemierre of the European Bank of Reconstruction and Development, who as dismissed reports of his candidature as "speculation". There have been reports in recent weeks that Mr Duisenberg will not stand down until January 2003 and, in the meantime, he is making his power felt.
So what does this all mean for future rate cuts? If the 2 per cent inflation target is a real one, then it will be at least June and possibly September before eurozone HICP - the European measure of inflation - falls to that level.
If, at the same time, the US economy picks up speed, there could be a very small window of opportunity in the autumn. But there is no doubt that this week's surprise cut from the Fed will concentrate minds in Frankfurt next week.
