ECB Officials Soft Pedal Trichet's Hawkishness

Market participants are not the only ones surprised by the seemingly hawkishness of ECB President Trichet's comments at last week's press conference. ECB officials themselves seem surprised and several have moved to contain the collateral damage. ECB's Nowotny is the most recent. Of course in diplomatic-speak, it is not that Trichet misspoke but rather than the market misunderstood.

Nowotny, like others, have said 1) current rates are appropriate (when does central banker say otherwise?) and 2) there is no need to change in the "foreseeable future". It is not immediate clear what the "foreseeable future" means, but whatever it means, it is more than the April when the market has about a 90% chance of a 25 bp hike priced in.

Weber, the BBK President goes further. He opines that euro zone inflation is likely to peak in March around 2.4% and that German and euro zone inflation will fall back below 2% in the medium term.

We still view Weber as the most likely successor to ECB's President Trichet whose term expires later this year. German officials have been critical of the ECB's actions during the crisis, especially the sovereign bond purchases.

Some have argued that Weber is not sufficiently diplomatic for an ECB president. However, we think that Germany did a great deal of horse trading in the EU to ensure that a German would get the nod this time. Moreover, any kind of reform of the EFSF or many of the other reforms being bandied about, would require Germany's purse. Having German central banker at the helm of the ECB would arguably be helpful in making it more palatable.

It is possible that Juergen Stark, the German official who is also the chief economist at ECB is a compromise candidate, but the problem with that is that Stark serves a non-renewable appointment on the executive board of the ECB.

Italy's central bank governor Draghi has also been mentioned. That Draghi worked for a large US investment bank may not be significant even if the optics are not helpful. However, frankly it seems to be Germany's turn and a great deal of political wheeling and dealing has been done to secure the seat for Germany.

In terms of policy, arguably with a perceived hawk like Weber in the wings, the need to demonstrate the ECB's anti-inflation resolve may not be as pressing as with other candidates.