Wednesday 8 March 2006

Canada raises interest rates, Australia holds

Yesterday, the Bank of Canada raised interest rates. From Bloomberg:

The Bank of Canada raised its main interest rate for the fifth straight time and changed its language to say another increase was less certain, causing the currency to fall by the most in two months.

The quarter-point increase today brings the target rate for overnight loans between commercial banks to 3.75 percent, the highest since September 2001, and narrows the gap with the 4.5 percent U.S. federal funds rate. All 34 economists polled by Bloomberg News predicted the move.

However, today, the Reserve Bank of Australia decided not to change rates. Again from Bloomberg:

Australia's central bank left interest rates unchanged for a 12th month after growth in Asia-Pacific's fifth-largest economy slowed and home-building approvals fell to a five-year low.

Central bank Governor Ian Macfarlane and his board kept the overnight cash rate target at 5.5 percent today, as forecast by all 22 economists surveyed by Bloomberg News. The bank last raised rates in March 2005. Macfarlane in February said rates were more likely to increase than fall, though he didn't plan a move anytime soon.

And the Bank of England also looks unlikely to change rates tomorrow, according to this Reuters report:

Interest rates will almost certainly stay at 4.5 percent this week and economists are no longer so sure the Bank of England will cut borrowing costs again in the next few months.

All 40 analysts polled by Reuters last week predicted the central bank's Monetary Policy Committee would keep rates steady for the seventh month this Thursday. Many said slow economic growth will prompt another cut as soon as May.

But more news showing the economy picking up speed and house prices once again rising has got people thinking that the next rate move may well be up, even if not for some time.

News such as this from Reuters:

Retail sales rose on an annual basis for a fourth straight month in February, a report showed on Tuesday, suggesting that consumer spending continued to hold up after the key Christmas holiday period.

The British Retail Consortium said that like-for-like sales climbed 0.6 percent in February on a year earlier after a meagre 0.2 percent annual gain in January.

Total sales, which include all floorspace, rose 3.5 percent, slightly ahead of January's 3.4 percent gain. The three-month rate for total sales also picked up to 4.2 percent from 3.6 percent, which the BRC said reflected growing floorspace.

Japan is certainly not raising rates tomorrow, but an end to quantitative easing is expected by many, and the latest report on bank lending will likely be pertinent to the Bank of Japan's decision.

Japan's bank lending rose for the first time in more than nine years, signaling an expansion of credit that may help the world's second-largest economy grow.

Bank lending rose 0.2 percent in February from the same month a year earlier, a central bank report in Tokyo today showed. Lending adjusted for factors including currency fluctuations, securitizations and bad loan write-offs rose 1.4 percent, the seventh monthly gain.

The European Central Bank had made its decision to raise interest rates last week (see earlier post). Excess liquidity apparently was a major factor, according to this Reuters report:

Three factors appear to have persuaded even the more reluctant ECB policymakers that they must redouble their efforts to keep that monster bottled -- inflation dangers, improving economic growth and masses of cheap money. The latter seems to have clinched the case for higher ECB interest rates.

Analysts said these factors -- coupled with a lack of dissenting voices on the ECB Governing Council -- have persuaded financial markets in recent days that the ECB is heading faster than previously expected toward an official interest rate of 3 percent, or even 3.25 percent by the year-end.

Data on German factory orders in January at least supports the notion that the economy is improving.

Orders rose 1.4 percent from December, when they fell a revised 0.3 percent, the Economy and Technology Ministry in Berlin said in a faxed statement today. Economists predicted a 1.3 percent increase, the median of 42 forecasts in a Bloomberg News survey showed. From a year earlier, orders rose 14.3 percent, the most since March 2004.

There is no interest rate decision in the US this week, but the upwardly revised fourth quarter productivity data released yesterday -- and reported by Reuters -- will no doubt be taken into consideration in the Federal Reserve's decision at the next FOMC meeting.

Worker output per hour fell at a 0.5 percent annual rate in the final three months of 2005, the first drop in nearly five years, the Labor Department said. That was a slight improvement from the 0.6 percent drop reported a month ago...

Unit labor costs -- a key gauge of profit and price pressure -- rose at a 3.3 percent annual rate in the fourth quarter, the report showed. That was down from an initially reported 3.5 percent rise...

Separate reports showed mixed results at U.S. chain stores last week.

Sales ticked up 0.2 percent last week after rising 1.5 percent in the prior week, and were up 4.3 percent compared with the same week a year earlier, according to a report produced by the International Council of Shopping Centers and UBS Securities LLC.

But independent company Redbook Research said sales at major retailers so far in March were down 2.5 percent when compared with the same period in February. Sales were up 2.4 percent last week compared with the same week a year ago.

And consumer credit data from the Federal Reserve, reported by Reuters:

U.S. consumer credit rose by a less-than-expected $3.94 billion in January as car and boat loans slowed, a Federal Reserve report showed on Tuesday...

Consumer credit outstanding rose to $2.162 trillion in January, rising at an annual rate of 2.2 percent from the revised $2.158 trillion in December.

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