By RICHARD BARLEY
Notice the difference.
The European Central Bank has gone from a standing start to rate-increase readiness in just three months after inflation moved above target. The Bank of England is still uncomfortably split over policy even after 14 consecutive months of above-target, and rising, inflation. This disconnect is likely to persist for a while: The ECB and BOE face a common problem but different risks.
The U.K. economic recovery is shaky. Manufacturing and construction look buoyant, but the much larger services sector remains sluggish. Retail sales slumped in February and the housing market remains fragile. The British Chambers of Commerce has cut its 2011 growth forecast to 1.4% from 1.9%.
By contrast, the euro-zone recovery is broadening from Germany and the sovereign-debt crisis hasn't weighed on aggregate growth. That gives the ECB greater confidence in seeking to pre-empt second-round inflation effects, which crucially have yet to show up in either the euro zone or the U.K.
The ECB also faces a different fiscal and political landscape. The U.K. government is embarking on a fiscal tightening, including public-sector pay freezes and job cuts, that is credible to investors. This tightening only starts in earnest beginning next month, which may encourage the BOE to maintain its ultraloose monetary policy for longer.
The euro zone in aggregate doesn't need to run such a tight fiscal policy. And the ECB is worried politicians will dodge hard decisions and water down a deal to reform the economic governance of the bloc at a summit March 11. The ECB's hawkishness may partly be a warning to governments not to rely on easy monetary policy.
Meanwhile, the ECB is continuing to supply cheap liquidity to the continent's banks. This may allow it to raise rates and send a signal to price- and wage-setters without necessarily upsetting financial stability. The BOE has made it clear that there will be no further measures to support U.K. banks, even as worries build that regulatory pressures will crimp lending and raise funding costs.
The ECB's hawkishness will affect the BOE. A growing gap between the two banks' rates could lead to a weaker pound, potentially importing more inflation. The oil-price spike will only exacerbate the challenge of balancing short-term inflation against long-term growth for both institutions.
The BOE must remain vigilant on wages and inflation expectations, but can afford to wait for more clarity on growth. The BOE's Monetary Policy Committee is likely to hold rates steady again this week , and rightly so.
Write to Richard Barley at richard.barley@dowjones.com
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