Analysis: Central banks still set to tighten despite Japan
FRANKFURT/LONDON (Reuters) – Will central banks dare to raise interest rates in the face of the disaster in Japan? Some investors are starting to doubt it, but the threat of inflation means most rate hikes are likely to go ahead.
Before the earthquake, central banks around the world were gearing up to tighten policy. Now markets are scaling back their pricing of future rate rises, as it becomes clear the damage to Japan’s economy could be worse than originally thought.
But unless there is a widespread, long-term crisis over Japan’s nuclear power plants, the economic impact on the rest of the world still does not seem as if it will be nearly large enough to alter central banks’ intentions.
“The good news/bad news is that Japan has not been an engine of global or Asian growth for some time,” said IHS Global Insight chief economist Nariman Behravesh.
“This means that the impact of much lower Japanese growth on the world economy will probably be limited and small.”
Norway’s central bank signaled on Wednesday it would raise interest rates slightly sooner than originally expected because inflation was picking up. It kept its key interest rate flat but issued a forecast implying a hike by June.
Its policy statement made a brief reference to Japan, saying the effect on global growth was “uncertain,” but focused mainly on issues such as global commodity prices and government spending curbs elsewhere in Europe.
Central banks still set to tighten despite Japan
FRANKFURT/LONDON, March 16 (Reuters) – Will central banks dare to raise interest rates in the face of the disaster in Japan? Some investors are starting to doubt it, but the threat of inflation means most rate hikes are likely to go ahead.
Before the earthquake, central banks around the world were gearing up to tighten policy. Now markets are scaling back their pricing of future rate rises, as it becomes clear the damage to Japan’s economy could be worse than originally thought.
But unless there is a widespread, long-term crisis over Japan’s nuclear power plants, the economic impact on the rest of the world still does not seem as if it will be nearly large enough to alter central banks’ intentions.
“The good news/bad news is that Japan has not been an engine of global or Asian growth for some time,” said IHS Global Insight chief economist Nariman Behravesh.
“This means that the impact of much lower Japanese growth on the world economy will probably be limited and small.”
Norway’s central bank signalled on Wednesday it would raise interest rates slightly sooner than originally expected because inflation was picking up. It kept its key interest rate flat but issued a forecast implying a hike by June. [ID:nLDE72F1OT]
Its policy statement made a brief reference to Japan, saying the effect on global growth was “uncertain”, but focused mainly on issues such as global commodity prices and government spending curbs elsewhere in Europe.
German investor morale hit by Japan, ECB rate signal
MANNHEIM, Germany (Reuters) – German analyst and investor sentiment fell unexpectedly in March on worries over Japan’s disaster and an expected rise in euro zone interest rates, a survey by the ZEW think tank showed on Tuesday.
The ZEW’s headline economic sentiment indicator fell to 14.1 from 15.7 in February, compared with the consensus forecast in a Reuters poll of economists for the reading to hold steady.
The index had been climbing fast, reflecting Germany’s faster-than-expected recovery from a deep recession in 2009. By the fourth quarter of 2010, the economy was growing 4 percent year-on-year.
“The strong changed occurred after the ECB rate hike announcement,” ZEW economist Michael Schroeder said. “But obviously there was some negative effect after (Japan’s) earthquake.”
The monthly index was based on a survey of 270 analysts and investors and was conducted between from February 28 and March 14, with responses at the beginning of the period more positive.
European Central Bank President Jean-Claude Trichet stunned markets on March 3 by signalling an interest rate rise from a record low 1.0 percent was likely next month, much earlier than had been priced in.
RECOVERY UNHAMPERED
Global price risks up, no common policy approach
BASEL, Switzerland (Reuters) – A spike in food and oil prices has made the threat of inflation more acute, but that does not mean authorities need to respond to the threat in a similar manner, leading central banks said on Monday.
A top European central banker said rising energy costs were posing a threat to both emerging and advanced economies. But a U.S. Federal Reserve official said more stimulus may be needed to keep lofty oil prices from dragging down the U.S. economy.
Jean-Claude Trichet, speaking as chair of talks on the global economy at a Bank for International Settlements meeting, said the latest rise in oil prices underlined inflation concerns, though he said that so far, the global economy was set for relatively robust growth.
“Additional tensions that have been observed in the price of oil and energy are giving an additional importance to the message we had in January to the global economy as a whole,” Trichet said.
“We are all devoted to continue anchoring solidly inflation expectations; that doesn’t mean we take the same decisions.”
A shock warning last week from Trichet, the head of the European Central bank, that the ECB could raise euro zone interest rates next month highlighted differences with the looser stance of the Fed, driving the euro sharply higher.
Fed Chairman Ben Bernanke, in a clear sign no imminent shift in U.S. policy is brewing, said last week that the rise in crude oil prices should lead to only a modest, temporary increase in U.S. inflation “at most.”
Global central banks point to more acute price risks
BASEL, Switzerland (Reuters) – A spike in food and oil prices has made the threat of inflation more acute, leading central banks said on Monday, but they warned tightening of policy in response will not proceed at the same pace.
Jean-Claude Trichet, speaking as chair of talks on the global economy at a Bank for International Settlements meeting, said the latest rise in oil prices heightened a warning he sent on inflationary pressures in January, though so far the global economy was set for relatively robust growth.
“Additional tensions that have been observed in the price of oil and energy are giving an additional importance to the message we had in January to the global economy as a whole,” Trichet said.
“We are all devoted to continue anchoring solidly inflation expectations, that doesn’t mean we take the same decisions.”
A shock warning by European Central Bank President Trichet last week that it could raise euro zone interest rates next month highlighted differences with the looser stance of the U.S. Federal Reserve, driving the euro sharply higher.
Atlanta Federal Reserve Bank President Dennis Lockhart on Monday said U.S. monetary policymakers should not rule out further bond purchases if things worsen — pointing to its continuing concern over economic growth.
ANCHORING INFLATION
Global c.banks point to more acute price risks
BASEL, Switzerland, March 7 (Reuters) – A spike in food and oil prices has made the threat of inflation more acute, leading central banks said on Monday, but they warned tightening of policy in response will not proceed at the same pace.
Jean-Claude Trichet, speaking as chair of talks on the global economy at a Bank for International Settlements meeting, said the latest rise in oil prices heightened a warning he sent on inflationary pressures in January, though so far the global economy was set for relatively robust growth.
“Additional tensions that have been observed in the price of oil and energy are giving an additional importance to the message we had in January to the global economy as a whole,” Trichet said.
“We are all devoted to continue anchoring solidly inflation expectations, that doesn’t mean we take the same decisions.”
A shock warning by European Central Bank President Trichet last week that it could raise euro zone interest rates next month highlighted differences with the looser stance of the U.S. Federal Reserve, driving the euro sharply higher.
Atlanta Federal Reserve Bank President Dennis Lockhart on Monday said U.S. monetary policymakers should not rule out further bond purchases if things worsen — pointing to its continuing concern over economic growth. [ID:nDYE7DH014] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic detailing 2010 commodity performances click here For a graphic showing FAO food index components, r.reuters.com/baz74r Calculator: oil and impact on GDP r.reuters.com/jux28r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
ANCHORING INFLATION
Axel who? ECB gets tough without hardman Weber
When it decided the time was right to crack down on inflation, the European Central Bank did so without the man who is often regarded as its toughest inflation hawk: Bundesbank chief Axel Weber. The ECB took financial markets by surprise by announcing on Thursday it could raise rates as soon as April — a decision its policymakers reached without Weber even in the room.
The German, who has appeared isolated at times over the last year because of his staunch commitment to price stability above all else, was absent without leave and did not attend the meeting.
“He’s tied up today,” a spokesman for the Bundesbank said of Weber, who last month announced he would step down from the central bank a year before his term ended and that he was no longer a candidate to head the ECB when Trichet’s term expires in October. Weber said his hardline views were not well received by other decision makers.
The ECB’s decision to flag a rate hike took markets completely unawares.
“The position of the Governing Council is that an increase in interest rates at the next meeting is possible,” Trichet said in his matter-of-fact style, sending the euro soaring.
Weber made a splash last May when the lone ranger came out swinging against the ECB’s decision to start buying government bonds – seen as a breach of protocol in the sanguine central bank which prides itself on unanimity in its decisions.
Mersch and Wellink ramp up ECB inflation talk
FRANKFURT/AMSTERDAM (Reuters) – The European Central Bank is ready to fight inflation by increasing interest rates when needed, ECB policymakers said on Tuesday, sending the euro higher against the dollar.
Comments by Luxembourg’s Yves Mersch and Nout Wellink of the Netherlands chime with those given recently by other ECB policymakers, including Executive Board members Lorenzo Bini Smaghi and Juergen Stark on Monday.
Mersch, referring to the next ECB staff economic projections, to be released in March, said the 17-country bloc’s central bank might move its risk assessment towards seeing upside risks from current view of balanced inflation risks.
“I would not be surprised if we adjust our assessment of (inflation) risks compared to December,” Mersch said in an interview with news agency Bloomberg.
“I would not be surprised at most colleagues concluding that we have upside risks to price stability.”
Wellink told the Wall Street Journal that rising prices worried him, too.
“I do worry about short-term developments” on inflation, he said. “The overall picture is not a picture I like very much.”
Consensus-maker Liikanen seen as potential ECB chief
FRANKFURT/HELSINKI, Feb 17 (Reuters) – Erkki Liikanen’s people skills and ability to craft joint opinions have made him a potential candidate to lead the European Central Bank but his Finnish nationality and past as a politician may hamper his chances.
The former EU commissioner is a proven consensus maker, a skill he honed throughout his long career in politics, and one that is seen as crucial for whoever is to replace Jean-Claude Trichet when his term as ECB president expires in October.
Liikanen, a marathon runner whose Facebook page shows him in a tracksuit, has drawn increasing attention from financial markets as a contender for the top ECB job since Bundesbank chief Axel Weber’s shock withdrawal from the contest last week.
He probably only has until mid-year to convince European leaders he is the right man for the job.
The Finn came second to Bank of Italy chief Mario Draghi as Trichet’s likely successor in a Reuters poll of economists this week, although finance minister Jyrki Katainen said on Thursday Finland was not about to put him forward and still saw the race as being between candidates from Germany and Italy. [ID:nLDE71F0RW] [ID:nHEL010044]
Liikanen’s consensus-building credentials set him apart from Weber, who bowed out saying he feared the ECB’s credibility would suffer if its president held minority views.
“It is important for the president of the ECB to be able to get people to agree, to be able to present the ECB’s decisions to the public in such a way that they do not become controversial,” University of Frankfurt professor Stefan Gerlach said. “He or she has to come across as a reasonable person in a world of uncertainty. Liikanen has that ability.”
ECB focus – Weber leaves ECB race to more moderate candidates
FRANKFURT (Reuters) – With Axel Weber out of the running to succeed Jean-Claude Trichet, the next president of the European Central Bank is likely to be somewhat less hawkish than the Bundesbank chief but could still be a German.
European sources told Reuters on Wednesday that Weber will not be a candidate to succeed Trichet when the Frenchman’s term expires in October — news that threw wide open the race to become the ECB’s third president.
Attention quickly focussed on two alternatives: Bank of Italy chief Mario Draghi, 63, and the German head of Europe’s bailout fund, Klaus Regling, with a clutch of others from smaller euro zone countries seen as possible compromise candidates.
Germany wants a “strong candidate” to succeed Trichet, a government spokesman said, adding that this person could be a German.
European financial sources say Draghi’s star has already waned due to the increasingly dominant role of Germany in addressing the euro zone debt crisis and the diminishing credibility of Italy’s scandal-best government.
That dominance is likely to ensure that German-style policy orthodoxy will prevail whoever claims the ECB crown.
Analysts turned their attention to Regling, 60.
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