Lifting interest rates solely to regain credibility is the sort of thing we see from emerging market or frontier central banks when they are in the midst of a crisis, usually a currency crisis. The ECB is not in that position, and nor is it likely to be.

So, any rate hike from here would certainly not be down to credibility alone, but we can see where Rehn is coming from here. He is basically saying that the ECB can wait and wait to see if the Iran crisis generates second-round inflation effects, but, by that time, it is likely to be too late.

The inflation genie will be out of the lamp, and it will be hard for the ECB to stuff it back in if its credibility has been damaged. This would be very detrimental because the ECB is a highly credible central bank when it comes to meeting its inflation target. The average inflation rate since the EMU started in 1999 is 2.1%, a fraction above the 2% target. If we look at longer-term inflation expectations, the key five-year forward-starting five-year inflation rate from the swaps market has averaged bang on 2% over the past twenty years. That's half a percent lower than the US equivalent, although we do need to take account of the fact that the Fed's target is PCE prices and this typically runs a couple of tenths under the CPI numbers.

In addition to this, the Fed also has an employment target, and many analysts expect this to generate a slightly worse inflation outcome and slightly higher inflation expectations than those from the euro zone, given that the ECB only has an inflation target.

Steven Barrow, head strategist of the Standard Bank, said the performance of inflation and inflation expectations would seem to suggest that the ECB has better anti-inflation credibility than the Fed. The fact that policy rates in the euro zone have, for the most part, been below those in the US could also be used to support this story.

The ECB knows that the advantages of strong anti-inflation credibility are precious, which is why Rehn made his comment and why the ECB will probably hike policy rates at the June meeting. The Fed probably won't hike so soon, and, even if it did, it would not cite retaining credibility as being high on the list of considerations. But that's a shame. For if Fed credibility already stands back a bit from that of the ECB, it is at risk of slipping back further. This is not just from its own (likely) inaction on policy rates in the short term, but also the attack on its independence that's coming from the White House.

President Trump recently appointed former Fed Governor Warsh as the new Fed Chair. The only impediment to giving him this role was safe passage through the Senate Finance Committee and then the full Senate; neither of which proved particularly troublesome given the Republican majority. This contrasts with the situation in the euro zone where all sorts of actors, from the EU parliament through to individual countries can effectively block a candidate. The fact that this has never been done does not attest to some sort of parliamentary majority or political bias but instead, the vastly more extensive and inclusive process of choosing a candidate in the first place.

“Our conclusion from all this is that if anybody needs to put anti-inflation credibility to the forefront of their thinking about policy and the possible need for a rate hike, it is the Fed, not the ECB. The Fed, and admittedly other central banks, rode their luck during the 2021/22 inflation surge as the increase turned out to be anything other than the “transitory” rise that former Fed chair Powell suggested at the start. Bond markets are already showing that it is a case of ‘once bitten, twice shy' as they react to the latest inflationary surge. Central bankers may need to nip this risk in the bud. But that seems something the ECB is prepared to do, not the Fed," said Steven Barrow.