Friday, 7 September 2007

ECB and BoE hold rates, tightening continues elsewhere

As expected, both the European Central Bank and the Bank of England left interest rates unchanged yesterday, citing financial market volatility as a factor.

One central bank that apparently sees no need to stop tightening is the People's Bank of China. Yesterday, it announced that the required deposit reserve ratio would rise by 0.50 percentage points to 12.5 per cent on September 25.

Interest rates are also rising in South America. Peru's central bank yesterday raised its overnight reference rate by a quarter percentage point to 5 percent, the highest level since at least July 2001. Overnight interbank rates in Venezuela rose yesterday, closing at 30 percent after the central bank said it would halt some of its lending operations to financial institutions.

In the meantime, there is still little direct evidence that the US economy is in serious difficulty. The ISM's non-manufacturing index remained at 55.8 in August, unchanged from July. In addition, Reuters reports that initial claims for state unemployment benefits fell last week while retail sales held up well in August although foreclosures on homes rose in the second quarter.

And the economy might continue to do well if the corporate bond market continues to hold up, as it appears to be doing so far despite the seizure in the commercial paper market.

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