Friday, 9 June 2006

Markets fall as central banks raise rates

Official interest rates continued to rise yesterday, so markets went the other way. From Bloomberg:

Stocks slumped worldwide, led by emerging markets, and commodities fell on concern that central banks will stifle economic growth as they raise interest rates...

Morgan Stanley Capital International's World Index, a gauge of 23 developed markets, fell 1.7 percent to 1276.07 as of 5:35 p.m. in New York. A rebound in U.S. stocks limited the decline. The MSCI Emerging Markets Index tumbled 4 percent to 697.33.

Copper, aluminum and zinc led declines in metals and crude oil dropped for a third day in New York. Shares of BHP Billiton, BP Plc and other commodity producers were the day's worst performers. Bonds and the dollar gained...

ECB policy makers...lifted the refinancing rate to 2.75 percent... Denmark's central bank raised its benchmark rate by a quarter point, to 3 percent... India lifted its benchmark interest rate by a quarter point, to 5.75 percent. South Africa raised its rate by half a point, to 7.5 percent. A quarter-point increase in South Korea brought its rate to 4.25 percent, a three-year high.

Turkey and Thailand both pushed rates higher yesterday. The Turkish central bank raised borrowing costs by 1.75 points, more than double analyst forecasts, to 15 percent.

However, there was no change in interest rates in New Zealand and in the UK. For the latter, expectations for a hike in interest rates later this year would probably also have been curbed by signs that the UK housing market may be slowing again and by a fall in manufacturing output in April.

And there is uncertainty in monetary policy in Japan too. From Reuters:

Prospects of an imminent end to zero interest rates in Japan dimmed on Thursday as Tokyo stocks plunged, even though economic data pointed to steady growth and a top central banker put on a brave face over market volatility. The Nikkei share average fell 3 percent on Thursday alone, bringing its cumulative losses from a five-year high in April to 17 percent and prompting calls for the Bank of Japan to keep interest rates at zero to support the economy.

"We would like the BOJ to take an appropriate monetary policy and support the economy," Chief Cabinet Secretary Shinzo Abe told a news conference.

"More specifically, we would like the BOJ to support the economy by continuing its zero rate policy," said Abe, a front-runner in the race to succeed Prime Minister Junichiro Koizumi in September...

The BOJ is widely expected to raise short-term money rates from present levels near zero next month, and Deputy Governor Kazumasa Iwata's remarks on Thursday suggested he was concerned about leaving monetary policy easy for too long.

"We must not ignore the risk of swings in the economy and prices becoming big in the mid- to long term as we maintain a very accommodative monetary policy for a long period," Iwata told business leaders in Akita, northern Japan.

On the stock market sell-off, Iwata blamed it on "position adjustments", though he said the BOJ would closely examine financial markets in making policy decisions.

Earlier in the day, BOJ data showed Japanese bank lending grew solidly in May.

The balance of outstanding loans held by Japan's four main categories of banks, including "shinkin" credit unions, rose 1.2 percent in May from a year earlier to 444.0265 trillion yen ($3.913 trillion)...

Excluding special factors such as loan write-offs, the loan balance rose 2.0 percent from the same month a year earlier.

Separate BOJ data showed on Thursday that Japan's most widely watched measure of money supply -- M2 plus certificates of deposit (CDs) -- rose 1.4 percent in May from a year earlier.

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