(May 11) – “The European Central Bank caught the financial markets off guard on May 10th with a surprise cut in European interest rates. Is this a sign of a worsening economic outlook in Europe?,” asks Economist.com this morning.

“Now they are all at it. Cutting interest rates is in vogue among the rich world’s central bankers. America’s Federal Reserve led the way, starting in January; then the Japanese pushed rates back towards zero and, on May 10th, the Bank of England announced its third interest-rate cut this year. Minutes later, to almost universal astonishment, the European Central Bank (ECB) belatedly decided to jump on the bandwagon and announced a quarter-of-a-percentage point cut in borrowing costs.

“That the ECB’s move came as such a surprise says more about the ECB than it does about the rate cut itself. After all, there has been no shortage of advocates arguing for a cut. Economists worried about the impact of America’s economic slowdown on Europe have favoured a cut for some time, as have some European politicians. The International Monetary Fund (IMF) called for the ECB to act when it published its World Economic Outlook on April 26th; the IMF’s chief economist, Michael Mussa, said it was time for Europe to become “part of the solution and not part of the problem”.

“The ECB’s response to the IMF, the OECD and everyone else, was to dig in its heels. A month ago, Wim Duisenberg, the ECB’s president, said he heard the calls but was not listening to them. As the protests against ECB inaction grew louder, the ECB became more defensive—and more intent, apparently, to demonstrate its complete independence from either political pressure from within Europe or interference from outside. So convincing was this demonstration of independent thinking (or pig-headedness, depending on one’s point of view) that most people had given up hoping for an early interest-rate cut.

“So what has changed? Less than you might think, it seems. The ECB’s previous resistance to a cut had been because of the bank’s continuing worries about inflation. Unlike many other central banks, the ECB’s statutory responsibilties are confined exclusively to price stability, and euro zone inflation has been running above the ECB’s target of 2% (a target which it sets for itself). Now it turns out that the ECB has uncovered a statistical distortion in its money-supply figures, one of the most important criteria by which it judges inflationary pressures.