London (CNN) – The text of the European Central Bank statement last week ran to more than one thousand words but only two of them were significant: “Strong Vigilance.”
When we saw these two words we knew: European interest rates are going up. Sooner rather than later.
So suddenly we were all looking at charts of the last tightening cycle which began in November 2005 to discover just how predictive this phrase really was. Sure enough, whenever Trichet used the phrase “strong vigilance” following an ECB meeting, a rate rise invariably followed after the next meeting or two.
It has become known as the “Trichet traffic lights” system. Phrases like “Monitor Closely” were red…..nothing expected just yet. When it went to “monitor very closely” or “exercise vigilance” then we were on amber…rates were moving and probably in the near future. But if the words “Strong vigilance” were uttered; The light’s at green. Rates are going up!
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