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FRANKFURT Venturing gingerly on to a path of tighter credit in Europe, the European Central Bank nudged up its benchmark interest rate today by a quarter point, to 2.25 percent.
It was the first time the central bank raised short-term rates in five years or changed them at all in two and a half years which made the decision something of a landmark in the history of this young institution.
But the bank's president, Jean-Claude Trichet, stressed that the move, which he signaled two weeks ago, was not the beginning of a cycle of interest rate increases like that undertaken by the Federal Reserve in the United States.
"We are not engaging, ex ante, in a series of interest rate increases," Mr. Trichet said at a news conference here following the decision. "We will continue to monitor closely all developments."
Mr. Trichet's studiously noncommittal tone suggested that the European Central Bank would sift through data on Europe's economic health before embarking on a further tightening of the money supply.
That appeared to mollify some European political leaders and business executives, who had warned with growing stridency in recent weeks that higher interest rates could choke off the Continent's still-fragile economic growth.
"The level of interest rates has been sensationally low for years, and as long as it remains just a quarter point rise and is not the start of a continuing series, then we can cope with it," the new finance minister of Germany, Peer Steinbrόck, told reporters in Berlin.
"I don't believe it will have any big negative impact," he added. "But I say again: as long as it does not lead to further steps."
Germany's economy, the largest and one of the slowest growing in Europe, has shown some new vigor in recent months one of the developments that emboldened the bank to act. Unemployment here dipped below 11 percent in November, the government said today.
The German Federation of Industries said the rate increase would not be harmful and might even serve as a warning to unions not to demand steep wage increases in contract negotiations. Other employers' associations criticized the move, as did the Austrian finance minister, Karl-Heinz Grasser, who said it "neither helps in the fight against inflation nor favors growth."
The European Central Bank's incremental approach to interest rates bolstered European stocks and bonds, although the euro slipped against the dollar.
Mr. Trichet's remarks were hardly a surprise, since he had signaled the bank's intention to tighten its monetary policy gradually in testimony before the European Parliament last week. But some economists were nevertheless struck by his moderate tone, especially given that the bank revised upward its projections for the inflation rate in Europe in 2006 to above 2 percent.
Taming inflation is the central bank's cardinal role; it aims to keep the inflation rate hovering just under 2 percent. To meet that goal, some economists said, a further rise in interest rates would seem almost inevitable.
"They were slightly more dovish than I expected," said Holger Schmieding, an economist at Bank of America in London. "There is a bit of a conflict between the bank's statement and the numbers they gave."
The central bank was essentially telling Europeans "to take it easy for the next two months," Mr. Schmieding said. He still expects another rate hike in March and a few more during the course of 2006, which would move interest rates toward a more natural level of 3 percent by the fall.
Economists said the wait-and-see approach reflected a continuing debate on the bank's governing council about whether and how fast to tighten monetary policy for the 12 nations that use the euro.
Mr. Trichet acknowledged that some of the central bankers on the council would have favored adopting a sharper rate increase now, while others would have been happier leaving the rate unchanged. As always, he said, the 18-member council made its decision by consensus.
The price of that consensus, some bank watchers said, was a statement that shed little light on the way forward.
"The hawks got their increase of 25 basis points, and the doves got an agreement not to map out a series of increases," said Thomas Mayer, the chief European economist at Deutsche Bank. "It is an uncomfortable situation for the bank because the hawks will keep coming back."
For Mr. Trichet, a courtly, disciplined Frenchman who took the helm of the European Central Bank in late 2003, the last few weeks have been perhaps his stiffest test in office. In addition to managing the internal debate, he has had to contend with members of the council, who have spoken publicly, even aggressively, about the need to raise rates or stand pat.
These voices, financial analysts say, confused the market and muddied the bank's communications strategy. At a conference in Frankfurt two weeks ago, Mr. Trichet reasserted his role at the bank's chief spokesman, reading a statement in which he all but announced the rate increase.
"No one was surprised," Mr. Trichet said of his fellow central bankers, "because I expressed the sentiment of the governing council."
Allan Saunderson, a longtime bank watcher who heads Euro Zone Advisors, a consulting firm in Frankfurt, said the behind-the-scenes drama was a reminder that the European Central Bank remains in many ways a political institution, despite its supposed distance from politics.
"The council of the E.C.B. is high politics," he said. "It may be monetary politics, but it is still politics."
In some ways, the bank's move was a declaration of political independence. The finance ministers of France and Germany had called for it to hold off on a rate increase. The prime minister of Luxembourg, Jean-Claude Juncker, attended today's board meeting to make that case.
Some experts said they believe Mr. Trichet chose to announce the rate increase in advance a rare departure from the bank's normal communications policy because of this fraught atmosphere.
"Any sustained cracks in the governing council could be used by politicians to crack open the council completely," Mr. Mayer said. "The politicians seem to think the E.C.B. is an easy target, which they can blame for their own problems. Trichet is standing up against that."
source: http://www.nytimes.com/2005/12/01/business/01cnd-euro.html?pagewanted=print 1dec2005
European Central Bank interest rate increases are unlikely to reverse the euro's year-long weakness against its Asian counterparts.
European Central Bank interest rate increases are unlikely to reverse the euro's year-long weakness against its Asian counterparts. The ECB increased its benchmark rate by a quarter percentage point to 2.25 percent Thursday.
With an economic recovery in the 12-nation euro zone still looking tentative, the euro could see even larger falls against Asian currencies.
In contrast, Asia's economic growth is gaining traction.
"It's hard to see much support for the euro apart from [European Central Bank President Jean-Claude] Trichet's hawkishness, so the euro could be in for a testing time once the rate hike is behind us," said Tim Condon, chief Asia economist at ING Wholesale Banking.
Last month, Trichet warned the markets that the ECB would raise interest rates after a long hiatus of five years to preempt incipient inflationary pressures. His comment strengthened the euro albeit briefly.
In Asia, the euro rebounded 2.3 percent to 1233.7 Korean won on November 23 from a 34-month low of 1205.8 won set on November 15, and was up 1.8 percent to 48.866 Thai baht on November 23 from a 1.5-year low of 47.996 baht set on November 16.
With some banks like UBS believing there's a risk of a "buy-the-rumor, sell-the-fact" scenario unfolding for the euro, the single currency could test multi-year lows versus Asian currencies in coming weeks.
Against the Korea won, the euro could slide back down toward the 34-month-low of 1205.8 won. Versus the Philippine peso, the common currency might break below the two-year low of 63.362 peso set Wednesday. For the Singapore dollar, the euro could be dragged lower toward the 19-month low of S$1.9823 set on November 17.
In late Asian trade, the euro was at 1217.4 won, 48.515 baht, S$1.9923 and 63.765 peso.
Although Trichet has indicated that the ECB wouldn't embark on a US Federal Reserve-style of incremental monetary tightening, the currency markets were nevertheless watching for longer- term policy cues that may have emerged from the meeting Thursday. Trichet made his rate comments days after data showed the euro-zone economy grew 0.6 percent in the third quarter, among the best quarters since 2000.
He also argued that keeping inflation low is the best way to promote growth and create jobs.
The ECB chief fears for the bank's credibility after the bank overshot its inflation target for six of the past seven years.
However, annual inflation for the euro zone slowed for a second consecutive month to 2.4 percent in November. The ECB's inflation goal is just under 2 percent.
"We continue to think that as the Eurozone recovery slowly broadens to include the consumer next year it will allow the ECB to go after the elusive goal of a full tightening cycle in a very gradual manner," said Jan Lambregts, head of Asia-Pacific research at Rabobank.
The Organization for Economic Cooperation and Development this week warned that an interest-rate hike now would be inappropriate. The OECD charged that the Eurozone economy was too weak and inflation too low to merit a rate increase by the ECB. It also credited the Eurozone recovery in part to low interest rates, a weak euro and robust export markets. But the recovery is not complete and domestic demand is stagnant, so "rates should remain unchanged until the recovery is locked in," the OECD said.
While economists are locked in a discussion over ECB interest rate increases, there is less ambiguity about the economic and interest-rate outlooks for Asia.
The World Bank last month said it expects East Asia's gross domestic product to expand at a 6.2 percent pace both this and next year. The OECD, meanwhile, raised its GDP growth forecasts for South Korea to 3.9 percent for this year, and 5.1 percent for 2006.
Many central banks such as the Bank of Thailand are also concerned over inflationary pressures and have already started to tighten monetary policy to prevent consumer prices from skyrocketing.
More importantly, many of the Asian central banks are showing a strong resolve to maintain a tight or even tighter monetary policy stance for the remainder of this year and into next year in order to nip incipient inflation in the bud.
In its fight against oil-driven inflation, the Bank of Thailand has raised its 14-day repurchase market target rate by 50 basis points each on October 19 and on September 7, and by 25 basis points at six of the previous eight meetings since August 2004.
Economists expect the Thai central bank's 14-day repurchase market target rate to rise another 25 basis points to 4.0 percent at the next policy meeting on December 14, before peaking next year at around 4.5-5.0 percent.
Given expectations that many central banks in the region will increase interest rates more than the ECB in the months ahead, the possibility that the euro will continue to underperform its Asian rivals is relatively high, analysts said. DOW JONES NEWSWIRES
source: http://www.thestandard.com.hk/news_detail.asp?pp_cat=22&art_id=6951&sid=5730604&con_type=1 1dec2005
The cost of money is rising not only in the U.S. but around the world, courtesy of global central banks hiking rates to curb inflationary pressures. At the moment, the dollar remains the big winner at the rate-hiking game, but next year it will likely be a different story.
On Thursday, it was the turn of the European Central Bank, which raised its key rate a quarter point to 2.25%, the first such move in five years. Nascent signs of a pickup in economic activity in the eurozone were enough to convince the ECB to move rates higher. The widely expected decision, however, didn't prop up the euro, as ECB president Jean-Claude Trichet downplayed market expectations for further rate hikes.
"We are not engaging ex ante in a series of increases," he told reporters after the ECB decision.
In recent action, the euro was trading at $1.1712 compared with $1.1791 late Wednesday.
The dollar was supported by strong U.S. economic reports, namely the Institute of Supply Management's November manufacturing survey. The ISM index dropped in November but was stronger than economists expected. The survey also showed a pickup in hiring by manufacturers.
Strong U.S. economic data, including Wednesday's news that the GDP grew 4.3% in the third quarter, all but confirmed expectations that the Federal Reserve will continue to lift rates at a measured pace of quarter-point increments.
The Fed is widely expected to hike its key rate to 4.25% on Dec. 13 and to continue hiking in early 2006.
The dollar also rose against the yen, going above 120 yen for the first time in two years. In recent action the dollar was trading at 120.22 yen vs. 119.82 yen Wednesday.
Earlier this year, the Bank of Japan made moves towards abandoning its four-year-old zero-interest-rate policy. But in recent months, and again on Wednesday, the BOJ also downplayed expectations of how quickly it will get there.
Deficit Dilemma
Still, foreign exchange analysts believe that the dollar will, at the very least, hit upside resistance next year. The greenback has been supported in recent weeks as U.S. firms repatriated overseas profits to benefit from tax breaks under the Homeland Investment Act, a provision of the American Jobs Creation Act of 2004. But with the act expiring at the end of the year, these flows will likely subside.
The dollar also remains supported by rising market expectations that the Fed will hike the fed funds rate to 4.75% on March 28. According to Miller Tabak, the market has been pricing in a 54% chance of such a move since Tuesday, when stronger-than-expected reports on consumer sentiment and durable goods were reported, compared to 36% previously.
But this would most likely be the end, or very near the end, of the rate-hike cycle for the Fed. According to Tony Norfield, global currency strategist at ABN AMRO, the money market is increasingly "toying with the view that U.S. rates will peak and could head lower by the end of 2006."
At the same time, risks are tilted for higher rates both in the eurozone and in Japan, despite the rhetoric of ECB and BOJ officials.
Both central banks are facing strong political pressure to not hike rates because growth in their respective regions has remained sluggish. A weak euro and yen help boost exports. Central bankers have therefore tried to dampen expectations of further rate hikes. But they've actually left themselves room to move rates slowly upwards, says David Powell, currency strategist at IDEAglobal.
Notably, Trichet hinted that all options remained on the table by reminding reporters that the ECB, unlike the Fed, monitors headline inflation, which includes energy prices.
"Given that headline inflation at 2.5% remains above the ECB's 2% target, that's a hint that [this rate hike] isn't the end," Powell says.
Once again, as long as the Fed keeps on lifting rates and positive rate differentials continue to attract foreign inflows into U.S. assets, the dollar will remain supported, Powell says.
The underlying threat stemming from the ever-rising current account deficit, however, may explain why gold has continued to rally even with current dollar strength and tame headline inflation. In recent action, gold was up 1.1% to $504.70 per ounce, on track for its highest close since 1987.
As explained by Peter Grandich here, gold may still be benefiting from a short-squeeze but also from investors' need to hold on to hard assets amid uncertainty about the underpinnings of the U.S. dollar.
Long-term U.S. Treasuries, meanwhile, have continued to benefit from foreign inflows. But on Thursday, the benchmark 10-year Treasury bond was falling 11/32, while its yield rose to 4.53%. The weakness followed the strong ISM report and as the market positioned itself for what's expected to be a strong November jobs report on Friday.
The rise in the yield of the 10-year bond slightly eased concerns that the yield curve, which plots the yields of short-term to long-term bonds, will invert, usually a precursor of economic recessions.
According to Michael Gregory, bond strategist at BMO Nesbitt Burns, there are currently two camps fighting each other in the bond market.
"On the one hand, those that believe that external financing of the current account deficit remain a risk are pushing yields higher," he says. On the other hand, "there are those that [think] the deficit remains well funded and that the Fed will go too far next year," meaning growth will at least slow.
"My take is that the two will balance out each other and we'll end with a flattish curve," Gregory says.
Stocks, meanwhile, were rallying sharply early Thursday afternoon after profit-taking dominated the first three sessions of the week. In recent trading, the Dow Jones Industrial Average was up 1.1% to 10,929.54, the S&P 500 was up 1.3% to 1265.56 and the Nasdaq Composite was higher by 1.6% to 2268.18.
In corporate news, Limited (LTD:NYSE - news - research - Cramer's Take), New York & Co (NWY:NYSE - news - research - Cramer's Take) and Gap (GPS:NYSE - news - research - Cramer's Take) were higher after each reported better-than-expected chain-store sales Thursday.
U.S. automakers GM (GM:NYSE - news - research - Cramer's Take), Ford (F:NYSE - news - research - Cramer's Take)and DaimlerChrysler (DCX:NYSE - news - research - Cramer's Take) were mixed ahead of reporting November sales.
source: http://www.thestreet.com/_tscs/comment/nickgodt/10255342.html 2dec2005
LONDON EUROPEAN stock exchanges have surged ahead as investors welcomed comments from the head of the European Central Bank suggesting its latest interest rate rise did not signal a series of increases.
The London FTSE 100 index shot up 1.16 per cent to reach 5486.1 while in France the CAC 40 rose 1.51 per cent to 4636.46. In Frankfurt the DAX jumped 1.41 per cent to reach 5266.55, its highest level since April 2002.
The Euro Soxx 50 index of leading eurozone shares added 1.58 per cent to finish at 3501.54.
As unanimously expected, the ECB lifted the minimum bid rate for its regular refinancing operations by a quarter of a percentage point to 2.25 per cent at its regular monthly policy setting meeting.
The guardian of the euro also increased its other two key rates the deposit rate and the marginal lending rate by 0.25 percentage point to 1.25 per cent and 3.25 per cent respectively.
It was the first time in two and a half years the ECB had altered its key rates, and the first upward rates move in the 12-country eurozone since October 2000.
But ECP President Jean-Claude Trichet, to the relief of investors, said the move did not automatically signal the start of a long series of rate hikes in the coming months.
"We are not engaging 'ex ante' in a series of interest rate increases. Our policy remains accommodative and continues to lend considerable support to sustainable economic activity and job creation," he said.
On the currency market the euro faltered against the dollar in response to Trichet's comments.
The single European currency in late day trade was at $US1.1704, down from $US1.1788 late yesterday in New York.
Wall Street shares got off to a strong start as US economic data suggesting inflation remains tame helped the market rebound from prior session losses.
The Dow Jones Industrial Average leapt 0.80 per cent to 10,892.25 while the tech-heavy Nasdaq advanced 1.15 per cent to 2258.47.
Data ahead of the opening showed US personal incomes increased 0.4 per cent in October and spending increased 0.2 per cent. Based on the report, consumer prices rose a modest 0.1 per cent in October after soaring 0.9 per cent in September.
"The economic numbers this morning certainly eased inflationary fears, lessening the fear of an overheating economy," said Peter Cardillo, chief market analyst at SW Bach.
Elsewhere there were gains of 1.75 per cent to 7536.94 on the Swiss Market Index, 1.45 per cent to 34,585 on the SP/Mib in Milan, 1.14 per cent to 3432.67 on the Bel-20 in Brussels and 1.76 per cent to 426.17 on the AEX in Amsterdam.
The Japanese stock market resumed its advance on confidence over the outlook for Japan's economy and company earnings, with some upbeat indicators from the United States providing further impetus, dealers said.
Tokyo's benchmark Nikkei-225 index closed up 1.74 per cent at 15,130.50 points.
That marked the highest closing level since December 13, 2000, when the blue chip marker ended at 15,168.68 points - but still a long way from the lofty heights of the late 1980s when the Nikkei climbed to about 39,000.
source: http://www.theaustralian.news.com.au/common/story_page/0,5744,17435272%255E1702,00.html 1dec2005
FRANKFURT The European Central Bank raised interest rates for the first time in five years Thursday, joining other major central banks in ending the cheap credit that restored global economic growth. Defying political pressure to leave rates on hold to support a fragile euro zone economic recovery, the ECB lifted its benchmark refinancing rate by 0.25 percentage points to 2.25%.
Money markets had fully priced in the move after ECB President Jean-Claude Trichet said two weeks ago that the central bank was ready to "moderately augment" interest rates, ending two-and-a-half years of record low euro zone rates.
After the announcement, the euro dipped slightly against the dollar to trade at $1.1738, down from $1.1768 earlier.
"Some market speculators speculated (about) a 50 basis point rate hike, so there is sort of disappointment. The key for the euro now is what Trichet will say and whether this is the start of tightening," said Carsten Fritsch, currency strategist at Commerzbank in Frankfurt, said.
Analysts said the euro might lose traction however if Trichet did not deliver a message that backed up views of many market players that the bank will press on with another two quarter-point rate rises in 2006 to stem inflation.
Politicians, unions and business groups fear even a small increase in rates could scuttle the economic recovery, especially hitting consumer demand.
The European Banking Federation said on Thursday that tighter credit would hurt consumer confidence, and the chairwoman of the EU Parliament's Economic and Monetary Affairs Committee made a last-ditch plea for rates to stay on hold.
"By raising rates you risk crushing this fragile recovery in growth," Pervenche Beres wrote in an opinion piece published in France's La Tribune newspaper.
Luxembourg Prime Minister Jean-Claude Juncker, who heads the Eurogroup of euro zone finance ministers, planned to make a similar pitch at the ECB meeting, arguing the inflation outlook was stable.
Analysts say the main question now is how much further rates will rise.
Markets were left unclear on ECB strategy when policymakers said they should not assume there would be a U.S.-style steady stream of rate hikes.
"We will be looking for clues to the scale of future rate rises, whether (Trichet) repeats the phrase that he used at the European Parliament (that the ECB would moderately augment rates)," said HSBC European economist Robert Prior-Wandesforde.
A Reuters poll last week showed most economists expect another 0.25 percentage points in the first half of 2006 and a rise to 2.75% by the end of September next year.
The rate hike, which takes effect Dec. 6, coincides with increasing concerns among central bankers globally about inflationary risks caused by high oil prices and super-cheap credit.
Analysts said the ECB's assessment of growth, which will be accompanied by updated economic projections from ECB staff, would provide an insight into future hikes.
"The growth scenario do they still see risks to the downside this is significant in terms of the timing," BNP Paribas economist Luigi Speranza said.
The staff projections are expected to show better growth and higher inflation than the last forecasts in September, and will give the first insight into the ECB's outlook for 2007.
New data on Thursday backed the case of steady growth in the final three months of 2005, giving a good start to 2006. The Purchasing Managers' Index showed euro zone manufacturing grew at the fastest pace in 14 months in November, although growth in France and Germany, the zone's two biggest economies, was softer than expected.
Unemployment in Germany fell far more than analysts had anticipated in November, building on a strong result in France, but confidence indicators have been mixed.
In its monthly bulletin, the Bank of Spain said the latest data were consistent with sustained growth in the final part of the year, although there were doubts over its strength.
ECB Governing Council member Lorenzo Bini Smaghi said Wednesday that the ECB expected quarter-on-quarter growth of 0.5% in the fourth quarter, building on a 0.6% expansion in the third quarter.
source: http://www.usatoday.com/money/world/2005-12-01-europe-rates_x.htm 1dec2005
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