Surprise move asserts ECB's independence

The European Central Bank (ECB) established its credentials last week, arriving on the world stage as a force to confound pressure from politicians and market sceptics, economists said.

By catching the world by surprise through co-ordination of rate cuts to 3 per cent in the euro zone countries, the ECB rose above the controversy about its independence which had been raging for months.

This action achieved in a single blow - and much sooner than expected - the long-awaited convergence of short-term rates in the euro zone countries ahead of the launch of the single currency on January 1st.

Ten of the 11 countries cut their rate to 3 per cent and Italy to 3.5 per cent, owing to concern that a steeper cut might have encouraged speculation against the lira.

But although the move was exactly what many leading politicians had been calling for in recent months, ECB-watchers argued that, rather than being a sign that the ECB was caving in to political pressure, the decision was a demonstration of the new bank's independence.

Although politicians such as German Finance Minister Oskar Lafontaine had insisted that a rate cut was necessary in order to boost growth and employment, a number of observers had warned that such pressure could have the opposite effect.

The logic was that loud and insistent calls would persuade central banks to dig in their heels and hold rates higher than might be necessary in order to demonstrate independence and attract credibility. So when the Bundesbank and the Bank of France on Thursday trimmed 0.3 percentage points off one of their key rates and all nine other central banks followed immediately with similar reductions, the markets were caught completely off-guard.

"Yesterday's rate cut was a tactical masterpiece of monetary policy-making in the euro zone," the financial daily Boersen-Zeitung said in its leader column on Friday. "The ECB and its national central banks could not have delivered any better proof of co-ordinated and loyal action."

Good monetary policy "is characterized by verbal warnings coupled with a surprise effect," the newspaper continued. "The ECB achieved both."

In fact, recent weeks saw a wealth of comments from leading monetary officials which could have been interpreted as a signal that the rates would be eased if economic indicators continued to point downwards.

It was for those very reasons - and not due to any political interference - that the move was made, the Bundesbank's Hans Tietmeyer told journalists on Thursday. ECB President Mr Wim Duisenberg told the Financial Times on Friday that he hoped the move would restore confidence and boost growth and investment. The benefits will be "mainly of a psychological nature".

Duisenberg rejected suggestions that the move had been induced by political pressure, saying the ECB had been aware of the need for such action for some time.

"The political pressures that arose in the meantime only made it rather more difficult to actually do something," he admitted. "And we had long discussions about that, because it does create a certain stubbornness in the minds of central bankers."