Thursday, 17 April 2008

China tightens, US still looking for rate cuts

China announced yet more tightening yesterday. Bloomberg reports:

China's economy grew 10.6 percent, faster than estimated, and inflation was close to the quickest in 11 years, prompting the government to order banks to set aside more money to slow lending.

Gross domestic product for the first quarter grew more than the 10.4 percent median estimate of 24 economists surveyed by Bloomberg News. Consumer prices climbed 8.3 percent in March, the statistics bureau said today in Beijing.

As the U.S. economy falters, policy makers in China, the biggest contributor to global growth, still regard inflation and overheating as bigger threats than a slowdown. The central bank raised the proportion of deposits that lenders must set aside as reserves to a record 16 percent to cool an economy that has grown more than 10 percent for nine straight quarters...

Reserve requirements will rise 50 basis points from April 25, the third increase this year, the People's Bank of China said today on its Web site. Within an hour of the announcement, Premier Wen Jiabao said in a statement that inflation is China's biggest problem.

Inflation is also a big concern in Europe, especially after the March rate turned out to be a little higher than previously estimated and boosted the view that the ECB is unlikely to cut rates soon.

European inflation accelerated more than initially estimated in March, reinforcing the European Central Bank's resistance to cutting interest rates even as economic growth cools.

The inflation rate rose to 3.6 percent last month, the highest in almost 16 years, the European Union's statistics office in Luxembourg said today. The March figure is up from 3.3 percent in February and exceeds an estimate of 3.5 percent published on March 31...

From the previous month, euro-area consumer prices rose 1 percent in March, according to today's report, a figure the EU's Torres called "quite high." The core rate of inflation, which excludes volatile food and energy costs, also was 1 percent from February. The core inflation rate was 2 percent from the year-earlier month, accelerating from 1.8 percent in February.

In contrast, the data from the US suggest that monetary easing will continue.

The U.S. housing implosion worsened in March, while manufacturing stabilized and a stagnant economy limited the ability of companies to pass higher food and energy costs on to consumers.

Work began on 947,000 homes at an annual rate, the fewest since March 1991, the Commerce Department said today in Washington. Industrial production gained 0.3 percent in the month, according to the Federal Reserve, and the Labor Department reported that consumer prices rose 0.3 percent, matching economists' forecasts...

"Economic conditions have weakened since the last report," the central bank said today in its regional business survey, known as the Beige Book for the color of its cover. "Nine Districts noted slowing in the pace of economic activity, while the remaining" three "described activity as mixed or steady."

The economic weakness is expected to remain the Fed's focus.

"Their primary focus has to be on the downside risk to growth," said Brian Bethune, director of financial economics at Global Insight Inc., in Lexington, Massachusetts. "There is very little ability for companies to pass on price increases."...

Economists surveyed by Bloomberg this month forecast the economy will not grow at all in the first half of the year, the weakest performance since the 2001 downturn.

Investors project the central bank will lower the benchmark rate by at least a quarter point later this month.

That's despite the fact that the 12-month inflation rate in the US remains higher than in Europe.

Prices rose 4 percent in the 12 months to March, the same as the year-over-year gain in February. The core rate increased 2.4 percent from March 2007, after a 2.3 percent year-over-year increase the prior month.

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