Coming Soon to Europe: Higher Rates

[HenryTo]

Looks like we may now be in a global liquidity tightening cycle by the world's central banks, although the BoJ may have reversed their position recently. Following is a link to a calendar of the ECB events. Note that their date formats is dd/mm/yyyy.

http://www.ecb.int/events/calendar/mgcgc/html/index.en.html
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Coming Soon to Europe: Higher Rates

By MARK LANDLER
Published: November 19, 2005
FRANKFURT, Nov. 18 - The European Central Bank said Friday that it was poised to raise interest rates, ending weeks of speculation about when Europe would join the United States in tightening credit.

The bank's president, Jean-Claude Trichet, said its governing board would soon "moderately augment" interest rates, which have not been raised in five years or changed at all in the last two and a half years.

"We will remove some of the accommodation which is in the present monetary policy stance," Mr. Trichet said, in what amounted to a remarkably blunt warning from a normally circumspect central banker.

While he did not give a timetable, Mr. Trichet's comments, made to a banking conference here, strongly suggest that the bank will raise rates at its next meeting, on Dec. 1. The remarks reverberated through European markets, briefly reversing the dollar's rally against the euro.

Most economists expect the bank to raise the benchmark rate a quarter-point, to 2.25 percent, with a further quarter-point increase early in 2006. Some believe that it will mimic the Federal Reserve by nudging up rates in multiple increments over the next year. The Fed has lifted the short-term rate 12 times, to 4 percent, since it began tightening policy in June 2004.

"The E.C.B. is determined to bring interest rates in line with what they view as their natural level, around 3 percent," said Jörg Krämer, chief economist at the HVB Group in Munich.

The bank, economists said, was also emboldened by a raft of reports this week that showed Europe's economy, after faltering late last year, finally growing at a more vigorous pace. The 12-nation euro zone grew 0.6 percent in the third quarter, compared with the previous quarter. Germany, once the dragging anchor of Europe, also expanded 0.6 percent in the quarter.

Now that the bank has made its intentions clear, it is likely to come under sharp criticism on a couple of fronts. European leaders have pleaded with the bank not to raise rates, still fearing that it could choke off the Continent's economic growth. Some economists argue that the bank's stated reason for tightening policy - the risk of inflation - is overstated.

Among the doubters is the managing director of the International Monetary Fund, Rodrigo de Rato. "We don't see too much wage inflation pressure," Mr. Rato said at a briefing here, after meeting with Mr. Trichet.

Nevertheless, Mr. Rato pointedly did not repeat the fund's previous warning that raising rates in Europe would be a mistake.

Mr. Trichet's statement answered at least one complaint about the bank: that it does not communicate clearly.

"It was very clear; therefore, it is very consequential," said Thomas Mayer, the chief European economist at Deutsche Bank. "Apparently, there is now an agreement on the board that they should move soon."

Like many bank watchers, Mr. Mayer said he thought the bank's 18-member governing council had been divided about whether - and when - to begin raising rates. Mr. Trichet began hardening the bank's tone at its monthly news conference in October, pointing to the risk of high oil prices and saying that rising inflation had to be monitored with "strong vigilance."

But since then, other board members have gone considerably further than Mr. Trichet in their public comments.

"It is now time to walk the talk," Yves Mersch, the governor of the Central Bank of Luxembourg, said this month. Such comments generated confusion in financial markets about whether the bank would increase rates in December or wait until next year to sift through more economic data. Critics noted that last year, the bank laid the groundwork for a rate increase, but held off after growth in Europe faltered.

Mr. Krämer of HVB said the bank might face a similar situation in the middle of next year. Housing prices, which have been rising at a torrid pace, are leveling off in several European countries, he said. The resulting loss of confidence could discourage consumer spending, which could be a drag on their economies.

The outlook for inflation is similarly murky. In October, the inflation rate in the 12-nation euro zone was 2.5 percent, well above the 2 percent threshold that the bank views as acceptable. The European Commission estimates that inflation will average 2.3 percent for this year. But some economists say inflation will drop below 2 percent by the middle of next year.

German officials have urged the bank not to raise rates, as they struggle to revive a long-dormant economy. The new coalition government pushed back by a year one of its major policy initiatives - an increase in the value-added tax - to prod German consumers into spending money in 2006.

Whatever the prospects for growth and inflation, economists say that the bank is acting now mainly because it thinks that its monetary policy is simply too loose. In his long-awaited signal on Friday, Mr. Trichet described current rates as "historically, exceptionally low."

[Goodfella]

http://www.bankofengland.co.uk/publications/speeches/2006/speech263.pdf



Is it right that the savings glut that Bernanke mentions, the majority is being invested in developed nations bonds? so therefore if the asians do start spending and stop saving like he suggests then interest rates will be higher in developed countries?