Friday, 12 January 2007

BoE raises interest rates, others may follow

The Bank of England sprang a little surprise on markets yesterday by raising interest rates. Reuters reports:

Interest rates hit their highest level in nearly six years on Thursday after the Bank of England stunned markets by raising interest rates to 5.25 percent, the third quarter-point hike since August...

Economists said further interest rate increases could lie ahead and futures markets quickly moved to reflect the possibility of two more hikes before the year was out.

A resilient UK economy was surely a factor. Again from Reuters:

The Office for National Statistics said factory output rose 0.3 percent on the month, in line with forecasts and leaving it 2.4 percent higher than a year ago.

Overall industrial output, which includes the energy sector, rose 0.5 percent in November, 0.8 percent higher on last year. That was the strongest monthly rate since March 2006 and above the 0.3 percent increase predicted by analysts.

And the Conference Board's leading index for the UK also showed a rise in November:

With the 0.1 percent increase in November, the leading index now stands at 138.6 (1990=100). Based on revised data, this index remained unchanged in October and increased 0.3 percent in September. During the six-month span through November, the leading index increased 1.5 percent, with six of the eight components advancing (diffusion index, six-month span equals 75.0 percent).

The European Central Bank, on the other hand, left interest rates unchanged, but according to Bloomberg, European Central Bank President Jean-Claude Trichet said at a briefing in Frankfurt: "I would say nothing here that would change the expectation by markets that we could do something at the end of the first quarter."

The eurozone economy would probably be able to take another rate hike, if the latest forecast is anything to go by. From Reuters:

Quarterly economic growth in the euro zone is expected to accelerate slightly in the first half of this year from rates at the end of 2006, the European Commission said on Thursday as it tweaked its forecasts higher.

The Commission raised its forecast for growth in the first and second quarters of 2007 to a range of 0.4-0.8 percent and 0.4-0.9 percent quarter-on-quarter respectively, from 0.3-0.8 and 0.3-0.9 percent seen at the end of November.

Next to raise rates, though, could be Japan. Today's data on bank lending and liquidity probably did not discourage such a view. From Bloomberg:

Japan's bank lending gained for an 11th month in December as companies and consumer borrowed more, confident that expansion in the world's second-largest economy will be sustained.

Loans rose 1.7 percent from a year earlier, the biggest increase in four months, the Bank of Japan said in a report today in Tokyo, after climbing 1.2 percent in November. The median forecast of three economists was for a 1.3 percent gain...

Lending adjusted for factors including currency fluctuations, securitizations and bad loan write-offs advanced 2.8 percent.

Japan's money supply, or M2 plus notes in circulation, rose 0.8 percent in December, the central bank said in a separate report. Broad liquidity, which includes bonds and investment trusts, gained 2.7 percent.

But yesterday's report of a fall in the leading index leaves doubts. From Reuters:

Japan's diffusion index of leading indicators, a key barometer of the economy, dipped below a key threshold in November, signalling that recovery may stall in the months ahead.

The leading index, which gauges economic conditions several months ahead, fell to a preliminary 20.0 in November from a revised 54.5 in October, government data showed on Thursday.

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