Global interest rates locked in upward mode
Thursday, January 11, 2007 10:41:24 AM (GMT-06:00)
Provided by: Reuters News
By Brian Love
PARIS, Jan 11 (Reuters) - An upward shift in global interest rates looked more than ever inevitable after a surprise increase by the Bank of England on Thursday and signals of more to come from the central banks of Switzerland and the euro zone.
One thing left open was precisely when the European Central Bank plans to pounce but ECB President Jean-Claude Trichet left little doubt among economists that the bank is considering another rise in March if the economy goes as well as it seems to be now.
"We have the sentiment that global growth is still very encouraging," he told a news conference after the governing council of the European Central Bank met and left its key rate, which has risen six times in a year, on hold at 3.5 percent.
After signals in recent days that counter those reckoning on a rate cut soon by the Federal Reserve to shore up a slowing U.S. economy, Trichet flung his weight behind the Fed view of a smooth and manageable deceleration.
"I think the Fed has been vindicated, that the slowing down in the U.S. will be an orderly slowing down," he said, adding that the outlook for economic growth in the emerging market economies of the world was good.
NOBODY'S DONE JUST YET
The surprise of the day came from Britain, where the Bank of England raised interest rates to their highest in nearly six years in its third quarter-point rise since August, to 5.25 percent.
And it predicted inflation rising further before easing back towards the target of 2.0 percent that it uses as a benchmark.
Swiss National Bank Chairman Jean-Pierre Roth did nothing either to dent market expectations for further rises from him after a fifth increase in December that took the key rate there to 2.0 percent.
By publicly reiterating his concern over the weakness of the Swiss franc, which has been hovering near eight-year lows of late, Roth's declarations compounded the rationale for further rises.
"We are in phase of normalising rates," he said. "We will go on as long as we are not convinced price stability is assured on the horizon of two to three years, which it is not yet. A weaker franc interferes with the goal of price stability," he said.
From Frankfurt, Trichet's message to the financial markets was that they were doing nothing very wrong in betting on a rise around the end of the first quarter, prompting most analysts to interpret that as a likely move if March.
"I would say nothing here that would change expectations by the market that we could do something at the end of the first quarter," he said.
"I would not say anything that would contradict that..."
After the British hike, economists said more could be coming from that side too and futures markets quickly moved to reflect the possibility of two more hikes before year-end.
"Markets are going to be wondering if this marks a more intensive process of monetary tightening," said Peter Dixon, economist at Commerzbank.
"Is the Bank going to raise again? That's the question that is going to be ringing round the dealing rooms this afternoon."
Add to that the Bank of Japan -- the timing of the next rise there remains hard to gauge but there again the guesswork is all about timing rather than the fact that the next move is up.
Even if Trichet sounded a little less strident is his use of the jargon analysts count on for timing hints, he was decidedly bullish about the outlook for growth, the main thing that might hold him back from raising rates to curb inflation.
He even went as far as suggesting the global growth for this year would be broadly similar if a touch lower than last year.
The International Monetary Fund has forecasts 5.1 percent growth in global gross domestic product for 2006 and around 4.9 for 2007, although IMF officials say a slight downward tweak for 2007 is possible.
(with reporting from London, Zurich and Frankfurt)
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Unpredictable BoE fails in mission to be dull
Thursday, January 11, 2007 10:06:33 AM (GMT-06:00)
Provided by: Reuters News
By Christina Fincher
LONDON, Jan 11 (Reuters) - For a central bank chief who declared he wanted to make monetary policy boring, Bank of England Governor Mervyn King appears to be failing miserably.
The Bank sent markets into a tailspin on Thursday when it raised interest rates to 5.25 percent, wrongfooting all but one of 50 economists polled by Reuters.
It is not the first time Britain's central bank has sent shockwaves across trading floors. Six months ago the Monetary Policy Committee's decision to tighten policy for the first time in two years also came as a surprise.
"It's the second time the Bank has wrongfooted the markets," said Peter Dixon, economist at Commerzbank. "The Bank is keeping us on our toes."
The forecasters' record has been good in recent years but this wasn't always the case, despite King's declaration in the late 1990s that "policy should be boring and predictable". For instance, in 1999-2001 a majority of economists in Reuters polls wrongly predicted rate decisions no less than six times.
Theories abound on what has caused the Old Lady of Threadneedle Street, as the bank is nicknamed, to act unpredictably on Thursday.
For some people, the Bank was simply girded into action by the strength of economic data and a desire to take pre-emptive action. Above-target inflation, strong house price growth and the threat of a wage-price spiral all argue for tighter monetary policy.
Others think a sneak preview of inflation data may be behind the move. CPI figures for December are not due until next week but were made available to Bank policymakers before the decision.
"Reading between the lines, we suspect that December's inflation print was sufficiently high to persuade the Monetary Policy Committee that an immediate move was necessary," said Richard McGuire at RBC Capital Markets.
DEAR GORDON
Consumer price inflation has been above the 2.0 percent target since May and accelerated to 2.7 percent in November, its highest since comparable records began a decade ago.
A rise above 3 percent would require King to write a letter to Chancellor of the Exchequer Gordon Brown explaining why inflation was so far off track and what measures were being taken. Such a letter has never been needed since the Bank won independence in 1997 and would inevitably cause a media stir.
Better then to be criticised for a communication failure but at least be seen to be dealing with the situation?
The picture will become clearer on Tuesday. The Office for National Statistics will release December inflation data at 0930 GMT and -- if required -- an explanatory letter from the Bank must be published within the next hour.
"The probability of a letter being written has gone up after today," said Alan Castle, economist at Lehman Brothers. "If the trigger for the rate hike is the inflation data, the Bank will be able to provide more clarity in its letter. If not, questions may be asked about its communications strategy."
Economists and interest rate forecasters, many of whom are thankful that their bonuses have already been paid, argue there was little to suggest a rise was imminent.
Policymakers voted unanimously to leave interest rates steady in December and the Bank's latest forecasts show inflation falling back sharply this year.
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