Friday, 6 June 2008

Trichet to tighten?

Instead of cutting interest rates as many had expected, the ECB may be preparing to raise rates instead. From Reuters:

The European Central Bank said on Thursday it may raise rates as soon as July against a backdrop of rising inflation pressures, shocking financial markets and dashing economists' hopes of lower rates later this year.

ECB President Jean-Claude Trichet dropped a clear hint that rates could go up next month, saying a quarter of a percentage point rise was "possible" although not "certain".

He said the Governing Council had agreed to leave rates on hold at 4 percent for this month but was determined not to fall behind the curve on tackling inflation...

More recently, rising food and record fuel costs have pushed up prices and were a major factor in the ECB's staff revising up their quarterly inflation projections on Thursday.

They saw inflation at around 3.4 percent on average in 2008 and 2.9 percent in 2009, assuming interest rates and commodity prices move in line with market expectations, sharply higher than forecasts just three months ago when they saw inflation at about 2.9 percent this year and 2.1 percent in 2009...

The ECB's new growth projections, which do not offer a quarterly breakdown, foresee around 1.8 percent growth in 2008 and 1.5 percent in 2009 -- versus March's 1.7 percent and 1.8 percent forecasts.

The BoE left interest rates unchanged yesterday.

While we wait for a possible rate hike from the ECB, other central banks have already made their move.

On Wednesday, Bloomberg reported that the Brazilian central bank raised interest rates.

Brazilian central bank President Henrique Meirelles raised the benchmark lending rate a half percentage point to curb accelerating inflation fueled by higher food costs and record consumer demand.

The central bank increased rates to 12.25 percent from 11.75 percent, as expected by economists surveyed by Bloomberg, after inflation quickened to a two-year high through mid-May...

Yesterday, Indonesia's central bank did the same.

Indonesia's central bank increased its benchmark interest rate for a second straight month, as surging food and energy prices force policy makers across Asia to tackle inflation.

Governor Boediono, in his first policy decision since taking over the post, raised the rate used as an indication for bill sales to 8.5 percent from 8.25 percent...

As did the Philippine central bank.

The Philippine central bank raised its key interest rate for the first time in more than two years after record energy and rice prices pushed inflation to a nine- year high last month.

Bangko Sentral ng Pilipinas increased the rate it pays banks for overnight deposits by 25 basis points to 5.25 percent, Governor Amando Tetangco told reporters in Manila today...

Which means that for all the hawkish talk from the Federal Reserve recently, interest rate differentials between the US and other economies are widening, not narrowing.

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