Friday, 11 May 2007

BoE raises rates, other central banks could follow

The Bank of England raised interest rates yesterday. FT reports:

UK interest rates hit their highest level in more than six years on Thursday after the Bank of England raised the cost of borrowing to 5.5 per cent...

In its statement accompanying the rise the Bank said it made the move because “output growth has remained firm. Business investment has been stronger than expected and, although indicators of consumer spending have been volatile, the underlying picture is one of steady growth.”

It added that relative to its 2 per cent inflation target, “the risks to the outlook for inflation in the medium term consequently remain tilted to the upside.”

The European Central Bank left rates unchanged yesterday, but as FT also reports, will probably move soon.

Jean-Claude Trichet, ECB president, committed the ECB to “strong vigilance” – a phrase widely understood to mean an interest rate rise is a month away. Eurozone interest rates are currently 3.75 per cent...

Commenting after a meeting of the ECB’s governing council in Dublin, Mr Trichet said “upside risks” to inflation remained, citing increasing capacity utilisation and the threat of high wage deals.

On Monday, the European Commission had raised its forecasts for growth and inflation this year, citing an unexpected first-quarter expansion in Germany, where factory orders rose 2.4 percent in March.

Even the Bank of Japan is committed to higher rates, according to another FT report.

Japan’s central bank governor on Thursday made the case for a gradual increase in interest rates, warning that keeping rates low could fuel the so-called yen carry trade and destabilise the country’s economy.

This is despite slower lending growth in Japan in April. From Bloomberg:

Japan's lending growth slowed for a third month as cash-rich companies ignored the lowest borrowing costs among major economies and used their own funds to invest.

Loans excluding trusts rose 1 percent in April from a year earlier, the Bank of Japan said in Tokyo today, slowing from 1.1 percent in March. Lending adjusted for currency fluctuations, bad loan write-offs and securitizations climbed 1.9 percent...

Japan's money supply, or M2 plus notes in circulation, rose 1.1 percent in April, the central bank said in a separate report. Broad liquidity, which includes bonds and investment trusts, gained 2.6 percent.

In addition, the OECD's composite leading indicator for Japan fell by 0.8 in March; its six-month rate of change has been on a downtrend since March 2006. The euro area did not do much better; its CLI increased by 0.1 in March but its six-month rate of change has fallen since June 2006. But the UK's CLI supported yesterday's rate hike; it increased by 0.7 in March and its six-month rate of change increased for the second month in a row. Elsewhere, the CLI for the US increased by 0.6 in March while that for China jumped by 7.4.

The US in particular would welcome an acceleration in its economy. Yesterday's trade data means that first quarter growth could be even worse than initially reported. From Reuters:

The trade gap grew more than 10 percent in March to $63.9 billion, as U.S. oil imports reached their highest level since August 2006 and the average price for imported oil rose to $53.00 per barrel from $50.71 in February, the Commerce Department said in a report.

Oil import prices continued to rise in April, a second report showed, suggesting further outward pressure on the trade deficit in the months ahead. Other import prices were surprisingly robust, analysts said.

The large March trade gap prompted some analysts to trim estimates of first-quarter U.S. economic growth to 0.7 percent or even less, from the 1.3 percent the government initially estimated last month...

Overall U.S. imports increased 4.5 percent in March to $190.1 billion, led by a gain of more than 11 percent in imports of industrial supplies and materials, which includes crude oil...

However, U.S. exports had another strong showing, rising 1.8 percent in March to $126.2 billion, second only to the record set in January.

There were other pieces of bad news yesterday.

In another worrisome sign for the economy, major department store chains said they had poorer-than-expected sales in April, with many blaming the early Easter holiday and cool weather for the results...

The private SpendingPulse survey released on Thursday showed retail sales increased 0.5 percent in April, but much of the gain was driven by a surge in gasoline prices.

After stripping out car and gasoline sales, retail sales grew just 0.1 percent in April, half the 0.2 percent rise in March, SpendingPulse said.

On the other hand...

In a bit of good news overshadowed by other data, the Labor Department reported the number of U.S. workers filing new claims for jobless benefits in the week ended May 5 fell unexpectedly by 9,000 to the lowest level since mid-January.

Together with the rising levels of imports and import prices, yesterday's US data mean that one cannot rule out the possibility that the Federal Reserve could yet join its foreign counterparts in hiking interest rates.

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