Thursday, 6 September 2007

Brazil cuts, Fed next?

While investors wait for the Fed to cut interest rates, Brazil's central bank has been cutting for some time and continued that trend yesterday, lowering its benchmark lending rate to 11.25 percent from 11.5 percent.

Elsewhere, central banks continue to watch and wait for the effects of the financial market volatility to appear, with Canada and Australia keeping rates unchanged yesterday.

The let-up in monetary tightening may be appropriate, if the OECD is correct. The OECD thinks global economic prospects have become less buoyant, trimming its 2007 growth forecast for the US to 1.9 percent from a May figure of 2.1 percent. Jean-Philippe Cotis, the OECD's chief economist, said that there is "a case" for a quarter-point interest-rate cut at the Fed's meeting this month, but a rate increase by the ECB may be "warranted" after markets steady.

Yesterday's US economic data seem to support the view of weaker US growth. From Reuters:

Pending sales of existing U.S. homes plunged by a record 12.2 percent in July, and private employers hired the fewest workers in more than four years in August, according to reports released on Wednesday that point to a weakening U.S. economy.

Planned lay-offs at U.S. companies surged by 85 percent in August due to turmoil in the subprime mortgage market, another report said.

However, the Fed's Beige Book released yesterday reports that financial market turbulence has hurt housing activity but has had little effect on other sectors of the economy so far.

And elsewhere in the world, activity in the services sector appears to be holding up well, the purchasing managers index slipping slightly for the euro zone to 58.0 in August from 58.3 in July but rising for the UK to 57.6 in August from 57.0 in July.

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