Interest Rate Rises - Bank of England Today, European Central Bank in September?
Interest-Rates / ECB Interest Rates Jul 08, 2007 - 02:16 AM GMTBy: Paul_L_Kasriel
As widely expected, the Bank of England (BOE) raised its policy rate by 25 basis points to 5.75% this week. This represents a cumulative increase of 125 basis points in a year's time. Although the European Central Bank (ECB) held its policy rate steady at 4.00%, its president, Claude Trichet, hinted that there would be more rate increases in the not-too-distant future.
My best guess is that the ECB lifts its policy rate by 25 basis points at its September meeting. In both the UK and euro-zone economies, money supply growth is high and rising (see chart below). This suggests that both the BOE and the ECB will have to continue raising their respective policy rates, perhaps into 2008, in order to curb inflationary pressures.
This means that so-called global liquidity, which has funded M&A, stock buyback and private equity activity will be slowing in the quarters ahead.
But the monetary tightening that will be "heard around the world" will be the one implemented by the People's Bank of China (PBOC). The PBOC has been raising reserve requirements but only gingerly letting these higher reserve requirements manifest themselves in higher overnight interest rates. With the Chinese inflation - both in terms of assets prices and goods/services prices - starting to boil, the PBOC will have to become more aggressive in raising short-term interest rates and reining in base money growth. And all of this implies letting the yuan move up against the dollar at a faster pace. When might this more aggressive PBOC policy tightening occur? A guess might be soon after the closing of the National Congress of the Communist Party scheduled for this fall.
By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary
Copyright © 2007 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.
The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.
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