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.

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

The Euro fell to 1.2637 dollars in early European trading from 1.2659 dollars late on Wednesday in New York.

The USD climbed to 115.14 yen from 114.86 yen on Wednesday.

In Asian trading, the USD had extended losses ignited Wednesday after European Central Bank chief Jean-Claude Trichet raised expectations for further rate increases in the eurozone.

Despite a slight rebound, “the dollar remains under selling pressure against the euro, pound and Swiss franc”, said Derek Halpenny, senior currency economist at The Bank of Tokyo-Mitsubishi in London.

However the US currency remains stable against the yen as speculation grows of a Japanese rate hike in July, he added.

Meanwhile sterling fell against rivals after David Walton, the only Bank of England policymaker to call for an increase in British interest rates earlier this month, died suddenly late Wednesday.

“It is with great sadness that the Bank of England has learnt that David Walton, an external member of the Monetary Policy Committee, died yesterday evening, unexpectedly and after a short illness,” the central bank said in a statement. Walton was 43.

The Bank of England’s rate-setting MPC voted 7-1 to keep British borrowing costs at 4.50 percent, minutes of the June 8 meeting showed on Wednesday. It was the tenth month in a row that the BoE froze its key “repo” rate — the rate at which the central bank lends to commercial banks.

The market meanwhile turned cautious on the yen, which had risen earlier this week as Bank of Japan governor Toshihiko Fukui sparked fresh speculation of an end to the central bank’s unconventional zero-interest rate policy.

The euro was changing hands at 1.2637 dollars against 1.2659 on Wednesday, 145.50 yen (144.74), 0.6871 pounds (0.6838) and 1.5635 Swiss francs (1.5593).

The dollar stood at 115.14 yen (114.86) and 1.2370 Swiss francs (1.2355).

The pound was being traded at 1.8393 dollars (1.8456).

SOUCE: AFP

Opposition lawmakers have called for Fukui’s resignation, saying he was unethical to have kept an investment in the fund of controversial manager Yoshiaki Murakami who was arrested on insider trading charges.

“Many analysts believe the central banker’s scandal could affect policy management itself,” said the Tokyo Shimbun newspaper. “Needless to say, governor Fukui has responsibility to explain what happened.”
Despite the two-day policy board meeting, the opposition has asked Fukui to appear before a parliamentary committee Thursday over the scandal.

However, the government came in support of the central banker, who has been popular in financial circles since his appointment by Prime Minister Junichiro Koizumi in 2003.

“Our understanding is that he fully explained the situation. I believe the government and ruling party members in general have understood the situation,” said Chief Cabinet Secretary Shinzo Abe, the government spokesman.

“We want the governor to fulfill his duties with the trust of the Japanese public,” said Abe, seen as a likely successor to Koizumi later this year.

Fukui has developed a complicated relationship with Koizumi, who openly questioned his plan to end the five-year policy of “quantitative easing,” under which the Bank of Japan flooded the financial system with cash to offer easy credit.

But in a show of independence, the central bank went ahead with a policy change in March, saying the economy has revived from its decade-long rut and no longer needed the highly unusual policy.

The central bank is expected this summer to follow up by raising interest rates, which are now nearly zero, again prompting concern by the government which cautions that the economy remains fragile.

Fukui’s scandal could lead to greater influence of the government over the central bank, said the Mainichi Shimbun.

“This may cast delicate shades of meaning to the independence and credibility of the Bank of Japan,” the newspaper said.

The central banker admitted Tuesday in the face of opposition charges that he invested 10 million yen (87,700 dollars) in 1999 in the Murakami fund when Fukui was in the private sector.

He said he earned an undisclosed profit and cancelled the contract well before last week’s arrest of Murakami, a former bureaucrat turned activist for shareholder rights.

The Nihon Keizai Shimbun, Japan’s business daily, noted that many central banks abroad publicized the assets of their governors.

“Because of the lack of written, clear rules, the problem happened this time,” it said, adding that Fukui broke no laws.

But the liberal Asahi Shimbun said that even if the investment was legal, “he should have got rid of the investment appropriately when he became the BoJ governor.”

“The head of the central bank, which has power to influence the flow of funds in the Japanese economy, should be extra careful even if it is a personal investment,” the Asahi said in an editorial.

SOURCE: AFP

Top cabinet members including Prime Minister Junichiro Koizumi sought to reassure investors that Japan’s economy is in solid shape after the Nikkei index fell over three percent Thursday — its biggest one-day loss this year.
“The Japanese economy is on a recovery path,” Koizumi said.

Kaoru Yosano, state minister in charge of economic and fiscal policy, also said the nation should not become pessimistic over stock prices.
“The time of volatility will last for some time but the market will start reflecting the fundamentals of the Japanese economy after that,” he said.

Following the government’s call, BoJ deputy governor Kazumasa Iwata said the central bank was not accelerating the process of draining excess cash from the banking system following the end to its ultra-loose monetary policy.

At the same time he indicated that the BoJ would continue to move toward an end to its zero interest rate policy despite the stock market plunge.
“We have not changed our view that interest rate levels will be gradually adjusted as the nation’s economy is shifting to a normal state from deflation despite the current movement of asset prices,” Iwata told a news conference in the city of Akita, as quoted by Kyodo News.

In an earlier speech Iwata dismissed concerns about falling stock markets, saying: “As investors’ position adjustments calm down, the stock and bond markets will recover stability.”

SOURCE AFP

“It’s all about interest rates; fears of hikes have heightened and that’s what spooked the market,” said Aequs Securities head of institutional trading Ric Klusman.

The May jobless rate of 4.9 percent was the lowest in Australia since November 1976, according to the Department of Employment and Workplace.
The figure came in well below market expectations of an unchanged unemployment figure, which stood at 5.2 percent in April.

According to the Australian Bureau of Statistics, the number of people employed jumped a seasonally-adjusted 56,000 to 10.14 million, compared with consensus forecasts of a 12,500 rise. It was the 12th time the data showed more than 10 million employed in the country.

Prime Minister John Howard described the figures as very encouraging.
“I am delighted that we have finally got the unemployment rate with a four in front of it,” he told reporters in Sydney.
“It is only one month’s figures but the symbolism of it is important and the long-term trend is very encouraging.”

Analysts warned, however, that if the jobless rate continued to fall, the Reserve Bank of Australia could be forced to again raise interest rates to curb inflationary pressure in the economy.

The data, and fears that interest rates will rise in the United States, caused the key SP/ASX 200 to drop 118.3 points to close at 4,907.2, well-off the May 11 record close of 5,364.5. The broader All Ordinaries Index shed 113.4 points or 2.27 percent to close at 4,878.5.
“Certainly financial markets are pricing in the risk that rates will have to rise,” Craig James, chief equities economist at CommSec told AFP.

“If this month’s data is followed by another strong set of jobless figures, then the Reserve Bank would probably have to step in with a modest rise in interest rates.”
Mark Rodrigues, ANZ Banking Group senior economist, agreed.
“With core inflation in the top half of the RBA’s target band and economic growth around potential, this supports our view that interest rates will need to rise again this year,” he said.

The RBA raised its official cash rate by a quarter percentage point in May — the first hike in the key rate in 14 months.
The move was seen as a preemptive strike to prevent strong global economic growth, high oil prices and upward wage pressures from feeding through to the Australian economy and fuelling inflation, which stands at 3 percent.

On Wednesday, the RBA left its cash rate unchanged at 5.75 percent following its monthly policy meeting but economists said the bank maintains a tightening bias that was likely to have been reinforced by the latest economic growth figures. The economy grew by a stronger-than-expected 0.9 percent in the March quarter, bringing the annual growth rate to 3.1 percent.

SOURCE: AFP

“The overwhelming majority of the governing council thought that a 25-basis point increase was appropriate,” Trichet told a news conference here. “But we did weigh the assets and liabilities of a 50-basis point rise.”

And European Central Bank chief Trichet said that additional rate hikes were on the cards in the future if the euro zone recovery continued to gather momentum.

“If our (recovery) scenario is confirmed, then further withdrawal of monetary accommodation is warranted,” Trichet said.

The ECB has notched up its benchmark “refi” refinancing rate three times since December, each time by 0.25 percent. With the latest move on Thursday, the refi rate now stands at 2.75 percent.

The European Central Bank has also amended its forecasts for growth and inflation in the 12-country eurozone this year and next year, warning that high oil prices would push up inflation and put the brakes on growth.

And the changing outlook for price stability and for economic growth in the single currency region played a role in the ECB’s decision to raise its key interest rates by a quarter of a percentage point to 2.75 percent on Thursday, ECB President Jean-Claude Trichet said.
Trichet told a news conference here that the guardian of the euro was raising its inflation forecast for 2006 to 2.3 percent from 2.2 percent previously.

At the same time, the bank upheld its 2007 inflation forecast at 2.2 percent.
The ECB defines price stability as annual inflation rates of close to but just below 2.0 percent.
As for the growth outlook, euro-area gross domestic product (GDP) was expected to expand by 2.1 percent this year, the same rate of change as the bank had previously been forecasting, Trichet said.

However, growth would slow noticeably to 1.8 percent next year, compared with a previous forecast of 2.0 percent.

The downward revision of the 2007 growth forecast was a result of the anticipated negative economic effects of high oil prices, the Frenchman said.

Nevertheless, the conditions “remain in place for growth in the euro area to remain close to its trend potential rate, despite the impact of the rise in oil prices,” Trichet said.

According to the latest consumer price data, area-wide inflation stood at 2.5 percent in May, up from 2.4 percent in April.

And the annual rate of inflation was likely to remain above the ECB’s 2.0-percent ceiling for some to come, largely as a result of high energy prices, Trichet said.
“In the months to come and in 2007, inflation rates are likely to remain above 2.0 percent, the precise levels depending on future energy price developments,” Trichet said.
“In the view of the governing council, risks to the outlook for price developments remain on the upside,” Trichet said.

The high level of liquidity in the eurozone economy, as measured by money supply data, was also a source of concern, the ECB chief said.
Strong money supply growth “confirms the stimulative impact of the low level of interest rates remains the dominant factor behind the current high trend rate of monetary expansion,” Trichet said.

“Monetary developments therefore require careful monitoring, in particular in the light of strong dynamics in housing markets.”

SOURCE: AFP

The decision-making body of the BoE, the Monetary Policy Committee (MPC), will likely freeze the “repo” rate, at which the central bank lends to commercial banks, according to a poll of 35 forecasters by AFP’s financial news service AFX News.
However, economists are speculating that the cost of borrowing could rise as soon as August to keep inflation in check.

The MPC, starting two-day deliberations on Wednesday, had warned last month that inflation would overstep its key 2.0-percent inflation target within two years if the cost of borrowing remained at the current level.

“No change is widely expected on Thursday, but on balance we still think the Bank will hike rates in August to 4.75 percent,” said Investec Securities economist Philip Shaw.
In May’s quarterly Inflation Report, the BoE had predicted that soaring oil prices would help push 12-month inflation above the government-set 2.0-percent target in the near-term, before dropping back to around target.

That fuelled expectations that the MPC was gearing up for a rate hike some time this year.
British 12-month inflation rose to 2.0 percent in April from 1.8 percent in March, lifted by an increase in air fares and rising domestic gas and electricity bills.
Other recent developments would also affect the rate-setting body’s decision this month, according to HSBC economist John Butler.

“Since the Inflation Report, the key developments have been a sharp drop in equity prices and a 3.0-percent rise in trade-weighted sterling,” Butler said.
“Both moves should dampen the committee’s fear of inflation and, hence, keep the MPC on hold.”

Last month the bank froze the cost of borrowing in Britain at 4.50 percent in May for the ninth month in a row against a backdrop of steady economic growth.
The MPC was split three ways in May’s interest rate vote for the first time for nearly eight years, minutes from the meeting showed.
Six MPC members, including BoE governor Mervyn King, had voted to keep interest rates unchanged at 4.50 percent, while David Walton voted for a quarter-point rise and Steve Nickell, in his final meeting, called for a quarter-point cut.

Following the departure of Nickell — who has voted for a cut on six consecutive occasions — the MPC now has a bias towards monetary tightening, according to HSBC’s Butler.
Nickell is being replaced on the Committee by David Blanchflower, professor of economics at Dartmouth College in the United States, who has run into controversy with his plan to split his time between the Britain and America.

The vote in May marked the first time the committee had split three ways since August 1998, and was only the third time since the bank was granted its independence by Britain’s Labour government in 1997.

The MPC has been reduced to eight members for its April, May and June meetings, after senior member Richard Lambert left his post ahead of becoming the new boss of employers’ body the Confederation of British Industry.

SOURCE: AFP

And a further tightening of monetary conditions is more or less a done deal when the euro bank’s decision-making governing council meets in the Spanish capital on Thursday.
Twice a year, the council holds its monthly rate-setting meeting at a venue outside its headquarters in Frankfurt. This time it is the turn of Madrid.

The question for some ECB watchers is whether the central bank might raise rates by a more aggressive 0.50 percentage point amid concerns about the inflationary effects of runaway oil prices, especially as an economic recovery in the 12 countries that share the euro appears to be gathering pace.

“An interest rate hike on Thursday is pretty much a done deal. The real question is what size the hike will be,” said Capital Economics analyst, Lucy Hartisson Monday.
ECB officials have been meticulously preparing the ground for a tightening of monetary conditions in recent months.

ECB chief Jean-Claude Trichet has been flagging further rate hikes for some time, repeatedly insisting that “strong vigilance” was required on the inflation front.
More recently, Luxembourg central bank chief Yves Mersch was adamant that further tightening was necessary, even if the exact scale and timing of a rate move had not yet been decided.
And last week, the head of the Austrian central bank, Klaus Liebscher, was asked whether a move was imminent and he replied: “I assume so”.

High oil prices were “more of a danger to price stability than to economic growth,” since they make themselves felt a lot faster and to a much greater effect on the cost of living than on economic recovery, Liebscher argued.

Indeed, the latest consumer price data showed a slight acceleration in area-wide inflation to 2.5 percent in May, way above the ECB’s ceiling of 2.0 percent.
Pressures are also building up further up the price pipeline, with money supply data showing a more than ample supply of liquidity in the euro-area economy, and very strong credit growth.
At the same time, an economic recovery appears to be gaining in breadth and depth, the latest data show.

“Data have continued to suggest that the eurozone economy is accelerating into the second quarter,” said Investec analyst, David Page.
Business confidence in Germany, the eurozone’s biggest economy, is close to its highest level in 15 years and consumer demand, traditionally the Achilles’ heel of German recovery, is also emerging from years in the doldrums.

Last week, the Organisation for Economic Cooperation and Development (OECD) upgraded its forecast for eurozone growth this year to 2.2 percent from 2.1 percent previously.
Analysts believe the ECB is also likely to raise its own growth forecasts when it publishes them, also on Thursday. The bank is currently predicting growth of 2.1 percent in 2006 and 2.0 percent in 2007.

However, the current strength of the euro might diminish the need for aggressive rate hikes, since a strong euro tightens monetary conditions in the single currency area by making eurozone goods more expensive to export and keeping a lid on the price of goods imported into the euro area.

“Objectively speaking, the data point more to a quarter-point move,” said Commerzbank economist, Michael Schubert.
Bank of America economist Holger Schmieding agreed.
“We don’t think the ECB will be ready to impose a half-point hike” at this point, he said, arguing that the bank would have flagged a more aggressive hike more clearly in advance.

SOURCE: AFP

US new home sales rose by 4.9 pct in April to 1.20 mln units, the highest level so far this year and well above analysts’ expectations for a fall to 1.15 mln, figures showed.

The data will spark further talk that the Federal Reserve may raise US interest rates further at its next meeting on June 29, particularly given that a slowing housing market was one of the main reasons seen for a possible pause in rate hikes.

In other data out this afternoon, US durable goods orders slumped by 4.8 pct month-on-month in April, much worse than analysts’ expectations for a much more modest 0.6 pct fall. The market was little concerned by these numbers, however, given that they followed a massive 6.6 pct jump in March.

‘The unexpectedly large 4.8 pct month-on-month decline in durable goods orders in April should be interpreted primarily as a drop back to more normal levels after a 6.6 pct jump in March, rather than a sign of a weakening economy,’ said Paul Ashworth at Capital Economics.

‘Overall, these figures are a little disappointing but certainly no disaster, particularly as the survey evidence is consistent with continuing robust growth in orders through the summer,’ he concluded.

The numbers caused the euro to reverse earlier gains which had come on the back of this morning’s stronger-than-expected Ifo survey on the German business climate.

Tomorrow, attention will turn to the second estimate of first quarter US GDP data, where analysts believe year-on-year growth could be revised as high as 6 pct from the previous estimate of 4.8 pct.

Elsewhere, the pound remained weak after this morning’s industrial trends survey from the Confederation of British Industry came in below expectations, showing a deterioration in the order books balance to -12 in May from -11 in April.

Earlier, UK business investment figures for the first quarter were very strong, though there was some disappointment that the improvements came from the manufacturing and construction sectors, while the services sector saw a decline in investment.

The first revision to first quarter UK GDP is released tomorrow, which will give additional data on household consumption. GDP is forecast to be left unchanged at a 0.6 pct increase from the fourth quarter for a 2.2 pct annual rise.

SOURCE: AFX