BoE - Ready to Take the Plunge?
BoJ - Pushing the Hawkish Envelope
SNB - Will the Weaker Swiss Franc Force a Hike?
The New Zealand yield spread saw the biggest basis point shift over the course of last week, as a surprise hike by the RBNZ sent short term rates spiking higher. However, the decision also sent long term rates lower in the aftermath, as the outlook for domestic growth does not look good amidst such restrictive monetary policy conditions. Meanwhile, despite dismal GDP reports, short term rates in the US gained as the price components of many economic indicators point to persistent inflation. In the UK, short term rates remained lofty as optimistic fundamentals continue to support speculation of a hike by the Bank of England next week, but the question remains: will it be 25 or 50 basis points?
BoE - Ready to Take the Plunge?
The Bank of England is eager to nip inflation in the bud as credit growth and housing sector expansion percolate price pressures, warranting some speculation that the central bank will opt to hike 50 basis points on May 10 instead of the usual 25 basis points:
Mervyn King, Bank of England Governor
Most of the measures of inflation expectations remain close to the target…We are completely determined to bring inflation back to target…We’ve seen a rise in domestic energy prices. We now expect them to fall back. Our view is that this could be quite a sharp fall back. For monetary policy, the object is to not get caught up in all that but to look through to the medium-term picture. In looking at inflation beyond the fall you do need to look at monetary expectations and credit growth. There is great difficulty in making a clear numerical link [between credit growth and inflation]…What determines asset prices in the U.K. is very much a function of what’s happening in world markets. - April 24, 2007
Kate Barker, Bank of England Monetary Policy Committee Member
Minor changes in the housing market are not going to make us change interest rates but the fact that the housing market has picked up strongly over the last year is significant. The rise of housing prices over the last year has been linked with the big fall we’ve seen in long-term real interest rates and to some extent with the restriction of supply in the housing market compared to demand. - April 24, 2007
Paul Tucker, Bank of England Monetary Policy Committee Member
With the Bank Rate at 5.25% and a modestly upward money market curve, I have characterized monetary conditions as ‘edging towards restrictive,’ so long as inflation does, as expected, fall back in the near-term…[Future monetary policy will depend] most crucially of all [on] whether wage bargainers and price setters recognize the absolute determination of the [MPC] to maintain price stability…Inflation expectations have been well anchored to our target. No one should be in any doubt that the [MPC] is determined to keep it that way. - April 26, 2007
Andrew Sentence, Bank of England Monetary Policy Committee Member
The longer inflation remains above target, the more there is the risk that it begins to affect people’s expectations…The fact that the housing market picked up strongly has been a very important signal that demand has picked up…I’ve been looking very closely at the business surveys, particularly those of price expectations. - April 24, 2007
Tim Besley, Bank of England Monetary Policy Committee Member
Its going to be critical in the May Inflation Report to see through what seems to be a short-term level of volatility…I don’t believe at this point that we are [in danger of losing the anchor of inflation expectations]. - April 24, 2007
BoJ - Pushing the Hawkish Envelope
Despite multiple signals that consumption remains weak and prices are contracting, Bank of Japan Governor Fukui still dares to talk about the need to normalize interest rates:
Toshihiko Fukui, Bank of Japan Governor
If the economic expansion mechanism is in place and prices are on an uptrend, we have to adjust interest rates; otherwise, it could cause wider swings in the economy. - April 27, 2007
We need to adjust interest rates despite near-term weak price growth, if we can confirm that long-term price moves are strong and the economy and prices are heading towards a good direction… If the economy moves in line with our scenario, we will adjust interest rates, not at a certain pace but in accordance with the pace of changes in the economy and prices. - April 27, 2007
Koji Omi, Japanese Finance Minister
Today’s data does not change my view that as a whole Japan’s economy is recovering steadily. - April 27, 2007
Hiroko Ota, Japanese Economics Minister
Production is weak, but the broad economic trend hasn’t changed?The end of deflation is still in sight, but we need to make sure that there is no return to deflation. - April 27, 2007
SNB - Will the Weaker Swiss Franc Force a Hike?
Even though inflation reports have been overwhelmingly mild, the Swiss National Bank appears to be considering the continuation of monetary policy tightening to pick up the slack of the dwindling Swiss franc:
Jean-Pierre Roth, Swiss National Bank President
The current situation remains comfortable due to the fact that the inflation outlook is moderate and last year’s drop in oil prices is having a favorable impact on the indices. - April 27, 2007
We will continue increasing interest rates to the full extent that is necessary in order to preserve price stability in the medium term…For the current year, the outlook for growth, employment and monetary stability remain very favorable. - April 27, 2007
We see a certain fragility on financial markets. Exaggerations occur. Something might happen that could cause high uncertainty in the market. This risk is real. This should be reckoned with. Unfortunately it is underestimated by many. Risk appetite is still very high. I doubt that all market participants assess risks correctly. I think the real test is yet to come…Therefore, one has to be very cautious. - April 25, 2007
The need for a normalization of interest rates isn’t as obvious anymore…In the past, we mentioned a normalization of the situation when we were hiking rates. It was clear there was the need to act on rates in the past…If I said the normalization has been reached, there would be a lot of noise. We’re aware that we’re gradually moving into a new phase…The franc’s tendency to weaken is creating problems… The weak franc is neutralizing the effect of past rate hikes…We’re asking ourselves whether companies are able to absorb cost factors through margins and productivity gains. Or will there be price increases? That’s where we see uncertainty factors. - April 24, 2007
Philipp Hildebrand, Swiss National Bank Governing Board Member
If the SNB concludes the development of the franc exchange rate is a threat to price stability – directly via import prices or indirectly via its [stimulating] effect on the economy – it must and will react accordingly with its monetary policy…As a matter of fact, the development of the franc exchange rate has kept monetary conditions favorable recently despite the continuing monetary normalization. - April 24, 2007