Friday, 10 February 2006

South Korea raises interest rates, others may follow

South Korea's Bank of Korea raised its benchmark interest rate by a quarter percentage point to 4 percent yesterday -- a three-year high. Other central banks, however, left monetary policy unchanged.

The Bank of England kept interest rates unchanged at 4.5 percent yesterday, the same day that the Office for National Statistics reported a deterioration in the UK's goods trade deficit to 6.1 billion pounds in December from 6.0 billion in November.

Meanwhile, quantitative easing continued in Japan, but the end of that policy may be near:

Bank of Japan Governor Toshihiko Fukui said core consumer prices will show clear gains in January and after, signaling the bank is getting closer to ending its policy of pumping cash into the economy and holding rates near zero.

Producer prices in Japan clearly have been showing gains.

Japan's producer prices rose at the fastest pace in almost 16 years last month as fuel and metal costs increased and a weaker yen raised the price of imported goods.

An index of prices that companies pay for energy and raw materials gained 2.7 percent from a year earlier, the Bank of Japan said in Tokyo today. The was higher than the median 2.6 percent rise projected by 31 economists surveyed by Bloomberg. Producer prices have risen for 23 straight months.

And the recovery in consumer demand appears likely to be maintained.

Consumer confidence among households with two or more people rose to 49.5 in January, the highest since June 1990, from 46.5 in December, the Cabinet Office said today in Tokyo.

There have also been recent indications that monetary policy may see further tightening in the US.

U.S. interest rates are at a neutral level, but further increases -- even preemptive ones -- may be needed depending on how inflation develops, Chicago Federal Reserve Bank President Michael Moskow said on Thursday.

"Even with the funds rate in the range of neutral, further changes in policy may be appropriate," Moskow said in a speech to the Risk Management Association, echoing similar comments made in January...

On Wednesday, fixed-income markets were rocked by reports that the newly-retired Greenspan had told investment bankers at a private meeting that the market was underestimating potential for higher rates.

And from the latest economic data:

The Labor Department said on Thursday the number of U.S. workers making new claims for state unemployment benefits rose 4,000 to 277,000 in the week ended February 4. Wall Street analysts had forecast a larger increase to 285,000...

It was the fifth week in the last six that claims were below 300,000. As a rule of thumb, some analysts say 350,000 is a threshold signaling a stable market and being consistently beneath this level a sign of strength...

The four-week moving average of initial claims, which smooths weekly volatility to yield a more reliable indication of underlying trends, declined by 7,750 to 276,500, its lowest level since April 2000...

In other data, the Commerce Department said wholesale inventories rose 1.0 percent in December, above expectations, as car stocks climbed and inventories of non-durable goods posted the largest monthly gain in nearly five years.

Wall Street had forecast a 0.4 percent increase in wholesale inventories. The inventories-to-sales ratio, which measures how quickly stocks would be depleted at the current sales pace, was unchanged at 1.15 months' worth in December, a historically lean level.

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