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

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

Hence, the TCMB continues to act decisively to stop the lira from weakening and to reduce inflationary pressures. We continue to be impressed and believe the TCMB will eventually succeed and we are getting closer to stabilisation of the lira – and setting it up for a potentially strong rebound. However, the situation remains fragile even though we think we are moving towards more stability.

We expect the TCMB to move very decisively today and intervene heavily in the FX market to show that it is not a one way street for the lira. We would expect the lira to strength somewhat today.

The recent turmoil in the Turkish markets is primarily a reflection of a worsening of global financial conditions. Hence, the development in these conditions will also be key to when they Turkish markets will stabilise. Therefore, Thursday’s rate decision from the Federal Reserve will be watched very closely by the Turkish markets.

In the coming days we will revise our forecast for the Turkish markets. We will clearly not rule out more rate hikes in the coming months as we would expect inflation to rise significantly due to the strong sell-off in the lira.

SOURCE: Danske Bank

While high oil prices were the main risk to inflation and therefore a major reason for the rate hike, we believe that the recently sliding rand – which will likely come under further pressure on the back of the ECB rate hike and the expected rise in US interest rates – lent support to the decision.

SOURCE: Danske Bank

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