Wednesday, April 19, 2006
Bank of England votes 7-1 to keep rates on hold
The Bank of England's concerns about the effects of high energy prices and the public’s inflation expectations put paid to any chance that the Bank of England might have considered trimming the cost of borrowing at its rate-setting meeting earlier this month.
Minutes released on Wednesday showed that the Bank’s monetary policy committee voted 7 to 1 at its meeting on April 6 to keep interest rates unchanged at 4.5 per cent.
For the fifth consecutive month the lone dissenter was Stephen Nickell, one of the MPC’s external members. Mr Nickell continued his quest for a 0.25 percentage point cut, again expressing the view that spare capacity in the economy and a lack of evidence that high energy costs have pushed through to consumer prices meant inflation was likely to fall below its 2 per cent target.
However, the majority on the committee - down from 8 to 7 after the departure to the CBI of Richard Lambert - felt less able to draw a conclusion on the degree of spare capacity in the economy. The level of spare capacity is important because it gives an indication of how much industry can expand before it begins to contribute inflationary pressures.
Most on the MPC were also less sanguine than Mr Nickell about the potential second round effects of high energy prices. Though up till now most of the increase in input costs have been absorbed by producers, recent data has shown factory gate prices starting to climb.
But it is the public’s perception that energy prices are boosting inflation that may be of greater concern. The minutes noted that consumer’s “inflation expectations had picked up in recent surveys and needed to be monitored carefully.”
On Tuesday the Bank released its quarterly survey of public inflation expectations, which showed people think prices are rising at an annual rate of 2.8 per cent. The last reading of the consumer price index showed inflation matching the Bank’s target of 2 per cent. The number for March is out on Thursday.
The public’s expectation of inflation is important because it may determine wage demands and lead to worries about high inflation becoming a self-fulfilling prophecy.
However, despite these concerns the MPC noted that wage settlements at the beginning of the year had shown no signs of an increase on the previous year.
Minutes released on Wednesday showed that the Bank’s monetary policy committee voted 7 to 1 at its meeting on April 6 to keep interest rates unchanged at 4.5 per cent.
For the fifth consecutive month the lone dissenter was Stephen Nickell, one of the MPC’s external members. Mr Nickell continued his quest for a 0.25 percentage point cut, again expressing the view that spare capacity in the economy and a lack of evidence that high energy costs have pushed through to consumer prices meant inflation was likely to fall below its 2 per cent target.
However, the majority on the committee - down from 8 to 7 after the departure to the CBI of Richard Lambert - felt less able to draw a conclusion on the degree of spare capacity in the economy. The level of spare capacity is important because it gives an indication of how much industry can expand before it begins to contribute inflationary pressures.
Most on the MPC were also less sanguine than Mr Nickell about the potential second round effects of high energy prices. Though up till now most of the increase in input costs have been absorbed by producers, recent data has shown factory gate prices starting to climb.
But it is the public’s perception that energy prices are boosting inflation that may be of greater concern. The minutes noted that consumer’s “inflation expectations had picked up in recent surveys and needed to be monitored carefully.”
On Tuesday the Bank released its quarterly survey of public inflation expectations, which showed people think prices are rising at an annual rate of 2.8 per cent. The last reading of the consumer price index showed inflation matching the Bank’s target of 2 per cent. The number for March is out on Thursday.
The public’s expectation of inflation is important because it may determine wage demands and lead to worries about high inflation becoming a self-fulfilling prophecy.
However, despite these concerns the MPC noted that wage settlements at the beginning of the year had shown no signs of an increase on the previous year.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 8:04 AM 0 comments
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Tuesday, April 18, 2006
Bernanke must learn to walk the lineon loans rate rises
With bond yields touching new highs lately, the Federal Reserve faces a new dilemma: Raise rates too much and housing takes a dive. Stop too soon and inflation flares up. To avoid either outcome, Ben Bernanke, the new Fed chief, will have to walk the line between too much tightness and not enough.
Right now, the Fed's more worried about rising prices throughout the economy than about falling prices in the housing sector.
Slack in the labor force and in industry is being used up at a rapid pace. Meanwhile, prices of industrial raw materials are jumping; gold's at a 25-year high and oil is setting new records almost daily.
In reaction, long-term interest rates have surged to multi-year highs. The 10-year Treasury note has just broken through the 5% mark, while the reincarnated 30-year bond is well beyond this level.
Another way of gauging the fixed-income market's sentiment towards inflation is to compare the yield on the standard 10-year Treasury note with that of its inflation-indexed version, known as TIPS.
The spread or difference between these two yields has begun to widen as people have started piling into TIPS, sending their prices up and their yield down. This widening gap between these two issues suggests that the market is no longer sanguine about the prospects for the future pace of price hikes.
Not surprisingly, this week's U.S. inflation numbers will be scrutinized very carefully by central bankers to see if they herald the beginning of a new, higher rate, or are more of the same.
And you thought it was tough for Johnny Cash to walk the line.
Right now, the Fed's more worried about rising prices throughout the economy than about falling prices in the housing sector.
Slack in the labor force and in industry is being used up at a rapid pace. Meanwhile, prices of industrial raw materials are jumping; gold's at a 25-year high and oil is setting new records almost daily.
In reaction, long-term interest rates have surged to multi-year highs. The 10-year Treasury note has just broken through the 5% mark, while the reincarnated 30-year bond is well beyond this level.
Another way of gauging the fixed-income market's sentiment towards inflation is to compare the yield on the standard 10-year Treasury note with that of its inflation-indexed version, known as TIPS.
The spread or difference between these two yields has begun to widen as people have started piling into TIPS, sending their prices up and their yield down. This widening gap between these two issues suggests that the market is no longer sanguine about the prospects for the future pace of price hikes.
Not surprisingly, this week's U.S. inflation numbers will be scrutinized very carefully by central bankers to see if they herald the beginning of a new, higher rate, or are more of the same.
And you thought it was tough for Johnny Cash to walk the line.
# posted by Dr Search- Principal Consultant at the Search Clinic @ 8:00 AM 0 comments
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