The Swedish central bank explained that it has raised the interest rate by 25 basis points to combat rising inflation, adding that there were risks linked to slower economic activity and financial market turbulence.

The bank has kept its options open, by explaining that future monetary policy decisions will be based on data that is released, but did advise that interest rates are expected to remain steady for this year.

The move saw the Swedish krona rise from 6.4275 from a price of 6.4785 prior to the news release.

Protecting your property or privacy is a natural instinct. There are many things we do as individuals to protect our property, but one thing very few people do is protect the value of their portfolio. We put our money in the bank or in a safe deposit box, without a second thought to how inflation and market risks will affect its value.

Market risk is a risk you take when you invest in the market. If the particular market you have invested in (stocks, real estate, bonds etc.) crashes, the value of your investment will drop. This risk can be reduced by spreading your money around in different markets, this way you reduce the exposure of your portfolio to any one market. If one or two markets experience a crash, the value of your portfolio will suffer less.

Inflation risk is another risk the value of your portfolio faces. Inflation decreases the buying power of your money. As inflation continues through the years, every $1 you own will be worth less and less, reducing the value of your savings and investments. If you have invested conservatively and have a large amount of your capital in bank accounts, CDs and bonds, even though it will appear that you are making money, with the effect of inflation you may actually be losing money.

Inflation and interest rates affect the Forex market in a pretty predictable way. If one countries interest rate less inflation is higher than another’s there’s a very good chance the value of the currency in that country is going to go up. This occurs as international investors seek to invest their currency where it can gain the most, placing more and more demand on the currency which pushes the value up. You can use this predictable pattern to profit from the Forex market.

Most investors choose a selection of investments from their home country for their portfolio. This does make sense, after all, investing in a market you know little about can add additional risk. There will also be a lot more information available for markets close to home than further away, and the availability of relevant timely information is very important for decision making. The end result however can be that all your entire investment portfolio will be held in a certain currency, if you’re from the U.S most of your investments (the stock market, bonds, real estate) are probably in U.S dollars.

The disadvantage of this is that your portfolio is also exposed to currency risk, if the value of the U.S. dollar goes down, the value of your portfolio also declines. If your home currency is worth less, the price of imported products is likely to go up and your purchasing power for an international holiday will also be less. You can reduce your exposure to currency fluctuations by taking out a hedge in the Forex market.

In other news the Bank of England’s (BoE) inflation report contributed to pressure on the GBP as the Forex market reduced its interest rate expectations. The BoE expects inflation to drop below the desired 2% annual CPI over the next 12 months. The GBP fell briefly as the inflation report was released, but quickly recovered to stabilize about 1.95.

Attention will soon turn to the USD as Forex Investors await Federal Reserve chairman Ben Bernanke’s testimony to Congress, which is expected to cause further weakness to the dollar. The Forex market is expecting Bernanke to suggest that inflation is stabilizing on recent news of retail sales only showing modest gains.

The latest release of minutes from the Federal Open Market Committee meeting (FOMC) revealed that Fed officials are uncertain about the future interest rate direction and are concerned about short term inflation.

Forex Investors reacted to the release of minutes from the FOMC by continuing to reduce their USD holdings, this saw the Euro rise to a high of 1.2650 USD overnight from 1.2590.

The minutes were consistent with the Fed chairman’s Ben Bernanke’s testimony to Congress over the past two days in which he suggested that a pause in rate hikes would be a possibility if economic data continues to point towards slower growth.

Forex Investors holding USD also found little comfort in the recent Philadelphia Federal survey for July which fell to 6.0 index points, well below market expectations of 12.0 index points.

In upcoming events for next couple of weeks, the Federal Beige Book summary of economic conditions will be closely watched as will the next durable goods orders data and the next release of gross domestic product (GDP).

The forward-looking part of the statement seemed a bit more balanced between growth and inflation than previously. It noted that, “although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain”. We are a little baffled by this more balanced signal in light of the Fed’s hawkish inflation campaign in recent weeks.

While the phrasing was more balanced, the statement kept a door open to further tightening by saying that, “The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information”. Importantly, this sentence explicitly links the near-term path of monetary policy to both inflation and economic growth, adding more balance to the statement.

Even though the current statement offers less guidance that previously, we still foresee a further 25bp rate hike in August, taking the fed funds rate to 5.50%, as we do not envisage any significant easing of inflationary pressures in the next couple of months. Beyond August we expect the pace of tightening to slow, as the pace of economic expansion will moderate in Q2/Q3 and the industrial cycle is set to soften in the summer and autumn. Further, the Fed is likely to be more cautious going forward, as it will be aware of the lagged impacts of the tightening carried out so far. However, as we expect inflationary pressures to keep building during the second half of this year and growth to pick-up again around year-end, we would pencil in a further hike to 5.75% in December or January. We see the fed funds rate eventually reaching 6% by Q2 2007.

SOURCE: Danske Bank

Rebounding consumer spending and global factors suggest the Czech central bank will have to restart its tightening cycle sooner rather than later. While we expect the first hike of 25bp in 3 months’ time, one could speculate that a higher-than-expected figure for June inflation and the CZK continuing to slide might prompt the CNB to hike as early as July. The new quarterly inflation forecast will be published in July and, in the past, the CNB board has moved rates in conjunction with its release.

SOURCE: Danske Bank

The decision to keep rates on hold should clearly be seem in the light of the fact that inflation remains very low – below 1%. That said, the timing of the next rate hike has clearly been brought forward, mainly due to the following circumstances:

The Polish economy is continuing to expand at an increasing rate, and GDP growth looks set to easily top 5% this year.

Wage growth is clearly accelerating

The currency (zloty) has weakened somewhat of late, and this will contribute to pumping producer price inflation further up in the coming months

The ECB will continue to tighten in the months ahead – as will the central banks in Central and Eastern Europe

Therefore, we also expect the NBP to become more hawkish in the coming months and start to signal that we are getting closer to rate hikes.

SOURCE: Danske Bank

Today’s decision probably suggests an NBS that is biding its time and waiting for more macro-data on the economy, especially inflation, before moving interest rates.

Even though the NBS kept interest rates unchanged at today’s meeting, we foresee more rate hikes further down the road due to building inflationary pressures in the Slovak economy – both demand side and supply side. Adding to the arguments for further rate hikes is the weakening of the Slovak koruna on the back of an unfavourable domestic political situation after the recent general elections, and global economic conditions. Therefore, we think the central bank might deliver another rate hike, perhaps even as early as July.

SOURCE: Danske Bank

At the same time, inflation will climb slowly, registering 1.3 percent in the first six months of the year and 1.7 percent for the 12 months, according to the report, from the People’s Bank of China’s research bureau.

The forecasts, released over the weekend and published in the Beijing Morning Post on Monday, come despite a stream of government measures aimed at slowing the economy, following growth of 10.3 percent in the first quarter.

China’s economy has showed few signs of responding to the cooling measures, such as an interest rate hike in April and policies targeted at curbing investment in the property sector.

China is the world’s fastest growing major economy, with expansion fueled mainly by investment and exports. It grew 9.9 percent in 2005.

SOURCE: AFP

The Riksbank’s goal is to hold inflation to less than 2.0 percent. Inflation has risen over the past year and stood at 1.6 percent in May, but was projected to rise further over the next two years, the bank noted.

“To ensure an inflation rate close to target and contribute to a balanced development of the real economy, monetary policy should become gradually less expansionary,” the bank said Tuesday, motivating its decision.

The higher rate of price increases was partly due to external factors such as rising energy prices, but the bank also cited rising household debt and rapid increases in housing prices in Sweden as causes for concern.

Looking ahead, the bank said economic activity was expected to remain good.

It forecast that gross domestic product (GDP) would rise by 3.7 percent this year, revised upward from a previous growth estimate of 3.5 percent.

Exports and investment would rise faster than previously expected, although consumer spending was now believed to be less buoyant than thought before, it said.

The continuing upswing would be accompanied by rising employment levels, further contributing to inflationary pressures.

“A couple of years ahead, inflation is expected to be in line with the inflation target of two percent,” the Riksbank said.

The bank raised its inflation forecast for 2006 to 1.5 percent from 1.1 percent earlier, and to 2.3 percent in 2007 from 2.1 percent.

These forecasts were based on expectations in Swedish financial markets, reflected in the level of forward contracts, that the repo rate would stand at 2.75 percent at the end of this year and just under 4.00 percent in 2009, the bank said.

But inflationary pressures made more aggressive rate hikes possible, it said.

“It is reasonable to assume that the repo rate will need to be increased further. It is possible that there will be a need for slightly more rate increases over the coming year than recent market expectations have implied,” it said.

Handelsbanken chief economist Peter Kaplan said the central bank’s view on inflation was unexpectedly hawkish.

“We believe this means that the repo rate will be raised another three times this year, and that it should reach 2.75 or 3.00 percent by the end of the year,” he told the TT news agency.

The repo rate was last changed in February, when it was also rose by a quarter point.

SOURCE: AFP

After seven consecutive sessions of gains in the dollar against the Euro, traders trimmed their positions after the Consumer Price Index data cemented the chances of a June Fed rate hike but shed little light on policy moves beyond that.

“The June rate hike was already priced in by the market,” said Marc Chandler, head of global currency strategy with Brown Brothers Harriman in New York.

“Although there’s a slight bias in the market towards another rate hike in August, the May CPI data doesn’t really help us judge what the Fed will do that far out,” he added.

“Short-term players were long dollars going into the data and got squeezed a bit,” said a currency trader with an asset management firm in New York.

The “core” consumer price index, excluding food and energy prices, rose a greater-than-expected 0.3 percent and the annual rate edged up to 2.4 percent, exceeding the upper threshold of what some Fed officials consider acceptable.

Growing expectations that the Fed will raise rates this month and possibly beyond, as well as a diminished appetite for risk, have boosted the U.S. currency this week.

Futures market have fully priced in a quarter percentage point rate hike by the Fed on June 29, the 17th such increase in two years. Traders will now look to the potential for the Fed to raise rates once again at its August meeting.

“The issue now is after June,” Greg Anderson, senior foreign exchange strategist with ABN-AMRO Bank in Chicago, said. “To be fair, the Fed doesn’t know and we don’t know. It will depend on the data,” he said.

Markets are expecting further euro zone rate hikes after the European Central Bank raised rates by 25 basis points to 2.75 percent last week, but investors have scaled back their expectations for the pace of tightening after comments by ECB President Jean-Claude Trichet following the meeting.

Fed officials including Chairman Ben Bernanke have made clear their concerns about inflation risks in the past week, cementing expectations for overnight rates to rise at the Fed’s next policy meeting on June 28-29.

SOURCE: Reuters

JON’S COMMENTS:
Well, I really thought that this news should have given the US Dollar a bit more of a break although I had a bearish view on it and knew this rally should remain fairly short lived. It really turned around quicker than I expected today so let see how it plays up in the coming days/week. My bearish dollar sentiment is surely reinforced here.

May’s figure breached the Bank of England’s government-set target of 2.0 percent — and was the highest reading since October 2005 when it stood at 2.3 percent.

On a month-on-month basis, the consumer price index climbed by 0.5 percent in May compared with 0.6 percent in April, according to Britain’s Office for National Statistics (ONS).

Both inflation numbers were in line with analysts’ consensus forecasts.

Upward pressure came from soaring domestic gas and electricity bills, which have soared over the past year owing to increased wholesale energy costs.

The surging cost of crude oil also fed through into rising petrol or gasoline prices, the ONS added.

The Bank of England had predicted last month that soaring oil prices would help push 12-month inflation above the government-set 2.0-percent target in the next two years, before dropping back to around target.

That had fuelled market expectations that it was gearing up for a rate hike at some stage this year.

Last Thursday the central bank froze its key interest rate at 4.50 percent for the tenth month in a row, maintaining a wait-and-see policy over the economy.

The decision was set against a backdrop of tumbling global stock markets and investor concerns that Europe and the United States would face fresh rate hikes after three years of favorable credit conditions.

SOURCE: AFP

Bollard said that given the unavoidable nature of the oil price rises, it would be inappropriate to raise interest rates in response.
“We do not expect to tighten policy in response to the high headline inflation in the short term,” Bollard said.
“But equally, we cannot afford to ease policy until we have more certainty that future inflation outcomes will be trading down comfortably below three percent.”

The central bank expects inflation to remain above three percent well into next year.
Reiterating comments made earlier in the year, Bollard said he did not expect to lower interest rates this year despite the rapid slowing of the economy.

Economic growth is expected to slow to 1.6 percent in the year to March 2007, before rising to 2.7 percent the following year.
“Export growth will recover as a result of the lower exchange rate and buoyant demand in world markets,” Bollard said.
“At the same time, household spending will be constrained by a continued weakening in the housing market, high petrol prices and a slowdown in employment growth.”

Many economists had been predicting a cut in the official rate later this year despite repeated indications to the contrary by Bollard. But worsening inflation pressures and a more hawkish tone from Bollard on inflation are making some take a second look at those predictions.
Westpac Bank senior economist Nick Tuffley said the scenario of no rate cut this year was looking increasingly likely.

“The risks to our call for a cut in October are all skewed one way,” Tuffley said.
“However, the Reserve Bank risks overestimating both growth and inflation over the next year, and rate cuts are less distant than it perceives,” he said.

ANZ Bank economists agreed the higher inflation risk made a cut less likely before 2007 but added that any evidence of a sharp weakening of the economy later this year could leave scope for a cut.

“We continue to believe the Reserve Bank will have scope to cut the official rate by the end of the year although this will still require a huge leap of faith on the inflation front,” they said.
ANZ is expecting a relatively strong March quarter gross domestic product number — which is due on June 23 — but economic data will again turn weaker afterwards.

“We expect such a change in domestic data to once again turn the markets attention back to an easing theme sooner rather than later.”

The decision to leave interest rates unchanged was widely expected by financial markets.

SOURCE AFP

The CB noted that the probability of increasing the policy rate in the near future is less now when compared to May, adding that they might lower the rates when the medium term inflation targets seemed attainable. Hence, the CB opted for a once-and-for-all increase in the interest rates to stop speculations of any further rate hikes. They think that this bold move would calm down the markets and prove that the CB could take drastic measures independently when it is seen necessary.

Therefore, we think that the CB not only wanted to take a measure to ensure the attainability of medium-term inflation target, but also to give markets a signal that the relative independency of the CB that we had been enjoying in the last couple of years was still intact.

Nevertheless, we think that even this excessive rate hike would not help the CB to attain the 5% year-end inflation target. In fact, we think that even the CB does not believe in this to happen. What the CB wanted to do is to ensure that the inflation target of 4% set for 2007 could be achieved. Hence, we do not expect an instant turnaround in the inflation readings in the coming months and forecast that the annual inflation by the end of the year would be higher than the upper band.

However, the CB’s determination would help the markets to adjust their medium-to-long term inflation expectations according to the official targets; given that we would not have significant external shocks and the government would show the same determination as the CB.

SOURCE: Yapi Kredi Bank