ECB - 4.00%...But When?

ECB – 4.00%…But When?
US Fed – The Same Old Consensus
BoJ – Walking A Tightrope

Yield Spread Analysis 04/10 – 04/17
On net, overall shifts in global yield curves were minimal over the course of last week. However, hot inflation data in the UK and strong expectations for New Zealand data have sent rates on both ends of the respective curves spiraling higher. Bank of England Governor Mervyn King was forced to write a letter to UK Chancellor of the Exchequer Gordon Brown on why annualized CPI breached the all-important 3.0 percent level, essentially sealing the deal for another rate hike by the central bank. Meanwhile, in New Zealand, estimates for first quarter inflation are for a strong rebound. Should the release meet or beat forecasts, the probabilities of further monetary policy tightening beyond the record of 7.50 percent will skyrocket. These forecasts have already sent the New Zealand dollar reeling, and could do much of the same to government bond yields.

ECB – 4.00%…But When?
Mr. Trichet’s failure to use the term “strong vigilance” after the most recent policy meeting slashed rate hike expectations for May. Nevertheless, the hawkish stance of ECB members has simply delayed forecasts until June:

Jean-Claude Trichet, European Central Bank President
“The medium-term outlook for price stability remains subject to upside risks, so that very close monitoring of all developments is warranted. Therefore looking ahead, acting in a firm and timely manner to ensure price stability in the medium term is warranted.” – April 12, 2007
“Our goal is to deliver price stability and be credible in the delivery of price stability over time.” – April 17, 2007

Klaus Liebscher, European Central Bank Governor

“There were some sectors of businesses where you have seen certain price increases like restaurants and in the service sector, but overall, adoption of the euro has had a positive result. We have seen the latest example in Slovenia. They have had a price increase, but overall, they did not see any inflationary pressure out of the exchange rate.” – April 17, 2007

Guy Quaden, European Central Bank Governor
“After a very good 2006, prospects for economic growth in the Euro-zone this year remain very encouraging?In that context we have to monitor closely the risks for inflation, and the risks for inflation are on the upside ? a new increase in our rates in the coming months is possible and even probable.” – April 17, 2007

Michael Deppler, IMF European Department Director
“Interest rates in the euro area may have to become restrictive if the current economic recovery continues.” – April 16, 2007
US Fed – The Same Old Consensus
The Federal Reserve refuses to sway from their staunchly hawkish stance, but with core inflation easing back, will the markets buy into the bias?

Frederic Mishkin, Federal Reserve Board Governor (Voter)
“Although the economy will inevitably be buffeted by various shocks, in the majority of circumstances the appropriate monetary policy response to stabilize inflation also helps to stabilize employment and output fluctuations around their maximum sustainable levels.” – April 10, 2007

Michael Moskow, Federal Reserve of Chicago President (Voter)
“So far this year, inflation has been somewhat elevated, highlighting the risk that inflation could stay stubbornly high?Whether policy will need to be adjusted and the degree of any adjustment will depend on the data we see in the months to come and how that data influences our forecast of the economy?Core inflation should gradually come down, moving closer to the levels I view as being consistent with price stability.” – April 12, 2007

Charles Plosser, Federal Reserve Philadelphia President (Alternate Voter)

“Inflation is uncomfortably high?If inflation doesn’t moderate as we expect, then the Fed will have to sort of think about what’s the appropriate action.” – April 17, 2007
“Consumption and employment are strong, business investment is weaker. The economy is not as strong as we had expected two months ago.” – April 11, 2007

Jeffrey Lacker, Richmond Federal Reserve President (Non-Voter)

“If inflation does not moderate, I believe additional firming may be needed.” – April 12, 2007

BoJ – Walking A Tightrope
The Bank of Japan and fiscal officials remain optimistic about growth prospects, despite signs that the economy is easing back into deflation:

Toshihiko Fukui, Bank of Japan Governor

“Monetary conditions remain very accommodative even after the decision (in February to raise rates)?Japan has emerged from a decade of difficult times and we are still in the midst of adjusting interest rates to a level that is truly desirable?The BOJ is in the process of raising rates gradually, albeit very cautiously.” – April 17, 2007

Koji Omi, Japanese Finance Minister
“Japan, for one, will continue to aim toward sustained growth, led by private demand, by taking measures to raise potential growth and simultaneously pursue fiscal consolidation. I believe that our efforts, together with those made by other member countries, will contribute to an orderly correction of global imbalances.” – April 16, 2007
Meanwhile, the IMF is a bit more cautious and believes low rates are the best policy for Japan:

David Burton, IMF Director for Asia Pacific

“Core inflation has dipped, become negative again. We believe that is temporary, but nevertheless underlying inflation is still very weak in Japan. It would be very bad for Japan and it would be very bad for the world economy if the recovery were to falter again and if the economy were to slip back into deflation.” – April 13, 2007

Simon Johnson, IMF Director of Research
“We are very supportive of the Japanese government’s current policy stance - we think they are exactly right.” – April 11, 2007