Friday, 11 April 2008

BoE cuts rates, other central banks focus on inflation

The BoE cut interest rates yesterday. Reuters reports:

The Bank of England cut interest rates for the third time in five months on Thursday to cushion the economy from the global credit squeeze, despite persistent worries about rising inflation.

The central bank said the quarter-percentage point reduction in its main rate to 5.0 percent was justified even though inflation was likely to spike this year.

"Credit conditions have tightened and the availability of credit appears to be worsening," the BoE said in a statement.

"The disruption in financial markets could lead to a slowdown in the economy that was sufficiently sharp to pull inflation below target."

The cut was not surprising. Although industrial output had grown at a better-than-expected rate of 0.3 percent in February, economic growth probably slowed in the first quarter and consumer confidence fell in March to its lowest levels in four years.

However, the BoE proved to be the odd man out yesterday. The ECB held firm, as Bloomberg reports:

European Central Bank President Jean- Claude Trichet signaled he's still not ready to cut interest rates even as the credit squeeze poses a greater threat to economic growth than policy makers anticipated.

"We are experiencing a rather protracted period of temporarily high annual rates of inflation," Trichet said at a press conference in Frankfurt today after the ECB kept its key rate at 4 percent. While financial-market tension may have "a broader than currently expected impact on the real economy," ensuring price stability is "very serious for us," he said.

And many central banks are still in tightening mode. For example, Iceland's. From Bloomberg:

Iceland's central bank raised its benchmark interest rate for the second time in three weeks, pushing it to the highest in Europe to shore up the krona and damp inflation that is running at three times the target.

The key rate was raised by a half point to 15.5 percent, the Reykjavik-based central bank said on its Web site today. Five of nine economists surveyed by Bloomberg had expected rates to be left on hold, while four forecast an increase.

Bloomberg also reports a similar move by the South African Reserve Bank.

South Africa's central bank raised its benchmark interest rate by a half point, the fifth increase in 10 months, forecasting that rising energy costs would keep inflation outside the target range until the end of next year.

The Monetary Policy Committee increased the repurchase rate to 11.5 percent, Governor Tito Mboweni said in a televised speech from Pretoria today. That was in line with the forecast of 13 of 27 economists surveyed by Bloomberg. The rest predicted no change.

And by Peru's central bank:

Peru's central bank today unexpectedly raised its benchmark lending rate to 5.50 percent in a bid to control the steepest inflation since 1999.

The earliest move yesterday, though, had come from Singapore. Bloomberg reports:

... The Monetary Authority of Singapore, which uses the exchange rate instead of interest rates to manage the export- driven economy, said it made an "upward shift" to the undisclosed limits within which it lets the currency fluctuate...

"An upward shift of the policy band will help to moderate inflation going forward while providing for sustainable growth in the economy," the central bank said in its twice-yearly review. "Inflation is expected to remain high until the middle of the year before easing in the second half." Previously, the central bank targeted "modest" appreciation of the currency.

The move came after a surprisingly strong rebound in economic growth in the first quarter.

The city-state's economy grew an annualized 16.9 percent in the three months ended March, after shrinking 4.8 percent in the previous quarter, the trade ministry said in a statement today. Economists were expecting a 10.2 percent gain, according to a Bloomberg survey.

The MAS move not only pushed the Singapore dollar higher yesterday but helped drive up other Asian currencies as well.

Singapore's policy shift helped drive the Chinese yuan to beyond 7 per dollar and the Malaysian ringgit to a decade-high on speculation Asian central banks will seek stronger currencies to reduce record costs for importing rice, wheat and fuel.

Singapore's dollar rose to a record S$1.3553 against the U.S. dollar, before trading at S$1.3583 by 5:18 p.m. in London, the largest daily gain since Oct. 7, 1998. The currency has gained 5.7 percent this year and is the second-best performer in the region outside of Japan.

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