Thursday, March 09, 2006


Central Banks Eye Rate Hikes

A pair of reports with relevance to currencies. "Inflation in Switzerland unexpectedly accelerated in February to the fastest pace in five months as energy prices and rents increased, adding to the central bank's case for a rate increase as early as next week. 'Rising oil prices are driving this,' said Thorsten Polleit, an economist at Barclays Capital in Frankfurt. Today's report 'is a further support for the Swiss central bank's policy of normalizing interest rates toward a neutral level, which we consider to be between 2 percent and 2.5 percent.'"

"The Swiss franc pared losses against the euro after today's report, climbing to 1.5612 by 8:36 a.m., after falling as low as 1.5641 from 1.5597 yesterday. Central banks in the U.S., Japan, and the dozen nations that share the euro, the world's three largest economies, have all signaled they may lift interest rates as growth picks up this year."

From Tokyo. "The Bank of Japan announced it will slowly let interest rates rise and gradually close the spigot that has sent a flood of excess cash into Japan's banking system during the past five years. The balanced approach is being cheered by Japan's government and investors. The Bank of Japan on Thursday declared an end to five years of ultra-easy monetary policy, which kept interest rates effectively at zero. But the central bankers also said they will not immediately raise rates."

"The central bank governors also said they will adopt what is called a reference rate for inflation, in essence aiming to keep price rises between zero and two percent a year. Despite government data showing that Japan is emerging from its slump and deflation is ending, influential politicians have urged restraint on monetary policy. They fear that raising rates could cut consumer spending and would make it more expensive for the government to pay off its massive debt."

"On the other hand, the B.O.J. governors are concerned that keeping the loose policy too long might trigger inflation and create a bubble in real estate prices."

"Stock market investors seemed to approve of the policy change. The benchmark Nikkei index closed up 409 points Thursday, more than a 2.5 percent gain, sending the Nikkei above the 16,000 yen line for the first time this month."

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