ECB: Clearing the way for an Italian hawk?
Jean-Claude Trichet was more dove-ish than expected in his press conference today after the European Central Bank's (ECB) latest meeting. The city was surprised, but Mario Draghi may come to be grateful.
You might not have taken Trichet for a dove, listening to his stern words about the "upside" risks to inflation. But in the strange world of ECB-watching these days, it's not what is said, but the precise words that are used to say it.
To give a sense where this has got to, let me quote part of a note from Barclays Wealth, explaining why the ECB president's opening statement suggested that a June rate rise was not on the cards after all. (This is no dig to the author - I've received plenty of similar emails since Mr Trichet sat down.)
"The ECB's introductory statement did not include the phrase "strong vigilance". It did refer to conditions being "still accommodative". We had expected "very" accommodative to be used (as opposed to plain "accommodative" last time), and were not (on balance) expecting use of the phrase "strong vigilance".
In our view, the use of "still" here is much the same as re-insertion of "very" would have been: it implies that the expression can be revised to "vigilance" at the next meeting on 10 June. We continue therefore to look for a 25bp rate increase at the 7 July policy meeting, with this signalled at the 9 June meeting by using the word "vigilance"."
So, I hope that's clear.
Before the meeting, people expected the ECB to raise interest rates at least twice more in 2011, with one rate rise in June and the other perhaps in September. After today, the city doesn't expect another rise before July, with the next one perhaps not arriving until the winter.
If that's the correct reading - and it probably is, given that the ECB has previously been eager to participate in this game of "spot the missing adjective" - then two conclusions follow.
The first is that the ECB is taking seriously recent signs that the Eurozone recovery is losing momentum, particularly outside Germany. And it's not been unduly spooked by the jump in eurozone inflation to 2.8% in April, the highest in two and a half years. Trichet's pointed comments about the dollar suggests a concern for the rising Euro as well. Lest we forget, the eurozone - particularly the periphery - is relying on an export-led recovery as well.
The second point - more speculative - is that the delay in the second rate rise might prove helpful to his likely successor.
It now seems all but certain that the distinguished Italian technocrat, Mario Draghi, will take over from Mr Trichet in November. What could be better, if you are the first Italian to stand as the guardian of European price stability, than to begin your time in office by raising interest rates?
It's a frivolous point, perhaps. Not to mention highly speculative. But there's a serious-ish point underneath.
At a time when every rate rise makes the countries on the periphery wince (and every rise in inflation makes German housewives curse the loss of their beloved D-mark), there was plenty of nervousness about the possibility of a German taking the helm at the ECB. Especially a well known hawk such as Axel Weber, who was the front-runner until he surprised everyone earlier in the year by announcing he would stand down.
But think about it. Precisely because of his background and reputation, Axel Weber would have come in needing to prove he would put Europe first and Germany second. The pressure on Draghi will be exactly the opposiite.
If you're sitting in Spain and Portugal, you might well wonder whether you would have been better off with a German in charge, trying to show off his inner Italian - than an Italian desperate to prove he's German underneath.