Thursday, 17 February 2011

BoE to raise rates, Fed to complete QE2

The Bank of England is set to raise interest rates this year, albeit slowly. Reuters reports:

New Bank of England forecasts opened the door on Wednesday for interest rates to rise slowly later this year but Governor Mervyn King told investors not to assume the central bank was in any hurry to pull the trigger...

A Reuters poll of economists pointed to rates rising to 0.75 percent in the final quarter of the year, with ten out of 50 expecting a move before July...

The central bank's February report showed consumer price inflation spiking up to between 4 and 5 percent in the middle of this year before falling back to around 1.7 percent in early 2013, a higher forecast profile than in November.

Those forecasts were based on the assumption that interest rates would rise to 1 percent by the end of this year, hitting 2.1 percent at the end of 2012...

The Bank predicted a bumpy ride for the economy this year, with its 2011 forecasts for growth lower than those in its November quarterly forecasts, but it is seen picking up to around 3 percent in the medium term.

Of course, the ability of the UK economy to sustain growth will influence the BoE's monetary policy. The reports on Wednesday were not particularly encouraging.

Reuters reports that consumer morale fell sharply in January.

Consumer confidence fell sharply in January to near its weakest level since early 2009, after a rise in sales tax dented shoppers' willingness to spend, a survey by building society Nationwide showed on Wednesday.

Nationwide's consumer confidence index declined to a seasonally adjusted 47 in January from 54 in December and just off November's 20-month low of 46.

Reuters also reports that the number of Britons claiming unemployment benefit unexpectedly rose in January for the first time in four months.

The number of people claiming jobless benefit rose by 2,400 last month, data showed on Wednesday, wrongfooting analysts who had forecast another modest decline.

The number of those without a job on the wider International Labour Organisation measure rose by 44,000 in the three months to December to 2.49 million, or 7.9 percent of the workforce...

Average weekly earnings growth slowed to just 1.8 percent in the three months to December, less than half the rate of inflation.

US economic data on Wednesday were mixed. Bloomberg reports:

Production at U.S. factories climbed in January for a fifth consecutive month, while builders began work on fewer single-family houses, showing the expansion remains driven by manufacturing as housing stagnates.

Manufacturing output increased 0.3 percent after a revised 0.9 percent jump in December that was more than twice as large as previously reported, figures from the Federal Reserve showed today. Total production, including mining and utilities, unexpectedly dropped. Single-family home starts decreased 1 percent to a 413,000 annual pace, the fewest since May 2009, according to the Commerce Department...

The Fed’s report also showed total production was unexpectedly restrained by a decline in utilities as milder temperatures curbed demand for heating. Output fell 0.1 percent after a 1.2 percent increase in December...

The Commerce Department report showed total housing starts, including single- and multifamily units, climbed 15 percent to a 596,000 annual rate, exceeding the median forecast of economists surveyed. Work started on 78 percent more dwellings with two or more homes, overshadowing the drop in single-family construction that makes up about 70 percent of the market.

But the US could have an inflation problem of its own.

Another report today showed wholesale costs increased for a seventh consecutive month in January, led by higher prices for fuel. The producer price index rose 0.8 percent, according to data from the Labor Department, matching the median forecast of economists surveyed. The so-called core measure, which excludes volatile food and energy costs, rose 0.5 percent, the biggest rise since October 2008.

The Fed had recently raised its forecast for US growth while remaining relatively sanguine about inflation. Reuters reports:

Federal Reserve officials raised their forecasts for economic growth last month but remained unhappy with the job market's recovery.

Minutes of the Fed's January 25-26 policy session released on Wednesday suggested the consensus was still firmly aligned with completing the planned purchase of $600 billion in government bonds. A few Fed members questioned whether continued stronger data would call for curtailing the program...

Fed officials raised their 2011 growth forecast to a range of 3.4 percent to 3.9 percent from their November projection of 3 percent to 3.6 percent, although projections for 2012 and 2013 were little changed.

Policymakers also made only minor changes to forecasts for unemployment and inflation.

While global monetary policy could be slow to tighten this year, JPMorgan thinks things could change dramatically next year. From Bloomberg:

Emerging-market central banks are failing to counter rising inflation, risking a “scary” and “synchronized” global monetary-policy tightening as early as next year, JPMorgan Chase & Co. said.

Real interest rates in emerging markets remain at “recession lows” because policy makers believe increases would pressure currency pegs to the dollar and risk exacerbating capital inflows, said chief economist Bruce Kasman in an interview in Beijing today.

The risk is that emerging markets tighten policy only after inflation leaks into developed economies and the U.S. Federal Reserve reacts, prompting simultaneous interest rate increases across the world after a longer period of “financial excesses,” Kasman said. JPMorgan strategists cut their year-end target for the MSCI Emerging Markets Index to 1,300 from 1,500 yesterday on expectations that accelerating inflation in developing nations will spur tighter monetary policy.

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