In April 2011, the European Central Bank’s staff and Governing Council were all optimistic. They had suffered through the panic and Great “Recession” and then the relapse in 2010 that birthed the term PIIGS. Despite all that and with considerable effort on their part (especially the purchasing of bonds), they thought there was reason to be quite optimistic.

Inflation by early 2011 had returned with a roar. In March 2011, the EU’s HICP (inflation) rate had moved back above 3% after being negative for several months in the summer and autumn of 2009. To policymakers, it was exactly what they were waiting for.

With that inflation tailwind and all their econometric models assessing the economy in the most positive terms, the ECB on April 6, 2011, voted for a “rate hike.” The monetary corridor would be raised by 25 bps, taking the MRO midpoint from 1% to 1.25%. It was widely expected that it would be just the first in a series to begin the process of normalization.

Europe’s central bank did follow it up with a second “rate hike” in early July 2011. At the press conference announcing the latter policy adjustment, ECB President Jean-Claude Trichet was practically gushing:

The further adjustment of the current accommodative monetary policy stance is warranted in the light of upside risks to price stability. The underlying pace of monetary expansion is continuing to gradually recover, while monetary liquidity remains ample with the potential to accommodate price pressures in the euro area.

He only noted in passing that “recent economic data indicate some deceleration in the pace of economic growth in the second quarter of 2011.” It was the same downside risks over financial uncertainty that Europe’s policymakers had been combatting since 2007. They were very confident that they had been fully successful dealt with.

Of course, none of that was true. In a matter of just weeks, Europe and the rest of the global monetary system would be embroiled in a second irregularity almost equal in scale and intensity to the first. There was no ample liquidity, for the defining characteristic of this next crisis was the same as the earlier one that brought on full-scale (interbank) panic.