Wednesday, 26 January 2011

India raises rates, UK economy contracts

The Bank of Japan left interest rates unchanged on Tuesday but the Reserve Bank of India took action. From AFP/CNA:

India's central bank on Tuesday hiked interest rates by 25 basis points, its seventh increase in less than 12 months in a bid to tame rising inflation as the country's economy booms.

The Reserve Bank of India has been one of the most aggressive central banks in raising the cost of borrowing as the nation has powered out of the global downturn with economic growth of nearly nine per cent.

The expected rise pushed the repo -- the rate on loans the central bank makes to commercial banks -- to 6.5 per cent, and the reverse repo -- the rate it pays to banks for deposits -- to 5.5 per cent.

The Central Bank of Nigeria also raised interest rates on Tuesday while the central banks of Hungary and Israel raised rates on Monday.

The Federal Reserve will almost certainly not raise interest rates when it concludes its monetary policy meeting today although US growth appears likely to be sustained. Bloomberg reports the latest US economic data:

Confidence among U.S. consumers rose more than forecast in January, reaching an eight-month high, as the outlook for jobs brightened.

The Conference Board’s sentiment index increased to 60.6 from 53.3 the prior month, figures from the New York-based private research group showed today...

The uncertainty in the housing recovery remains a risk for the economy though.

The S&P/Case Shiller index of home values in 20 cities dropped 1.6 percent in November from a year earlier, the biggest 12-month decrease since December 2009. The group also said prices dropped 0.5 percent from October.

Despite persistently high inflation, a rate increase from the Bank of England also looks unlikely after the UK economy unexpectedly shrank in the fourth quarter. From Bloomberg:

Britain’s economy unexpectedly shrank the most in more than a year in the fourth quarter as construction slumped and the coldest December in a century hampered services and retailing.

Gross domestic product fell 0.5 percent after increasing 0.7 percent in the previous quarter, the Office for National Statistics said in London today. Growth would have been “flattish” without the impact of the weather, it said. The median forecast in a Bloomberg News survey of 33 economists was for an increase of 0.5 percent.

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