ECB – Now or Later?
The European Central Bank has made it clear that a rate hike is on the horizon. The only question is whether the markets will see it in November or December:
Jean-Claude Trichet, ECB President
“If our assumptions and baseline scenario are confirmed, it will remain warranted to further withdraw monetary accommodation. The ECB governing council will continue to monitor very closely all inflation risks.” – October 26, 2006
Jose Manuel Gonzalez-Paramo, ECB Executive Board Member
“In a medium haul, it is important for (the) Euro-zone inflation rate to stay below 2.0% level. In order to steer Euro-zone monetary policy properly, it is important for the ECB to watch inflationary pressure in the area. But the ECB determines its policy steering based on medium-term economic projection. So, the central bank can accept short-range, temporary fluctuations of inflationary pressure.” – October 27, 2006
Lorenzo Bini Smaghi, ECB Executive Board Member
“Deciding the end of the tightening cycle is as difficult as the start, if not more. In addition to the uncertainty on the timing of the cyclical peak and the sustainability of the recovery, there is an even greater one on whether the interest rate is at a level which may be deemed compatible with the maintenance of price stability.” – October 26, 2006
Hans-Werner Sinn, IFO President
“These survey results indicate that the economic expansion will continue despite the increase in VAT next year.” – October 25, 2006.
However, some in the Euro-zone feel rates and the currency are exactly where they should be:
Thierry Breton, French Finance Minister
“About the ECB, I hope this pause will continue. The euro is absolutely fully valued against the dollar and any further rise would be excessive.” – October 25, 2006
US Fed – Divergence of Data and OpinionAlthough recent data has indicated not only slowing economic growth, but weaker CPI as well, some central bankers remain extremely hawkish:
Except of the FOMC Statement
“Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market…Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions…Nonetheless, the Committee judges that some inflation risks remain.” – October 25, 2006
Jeffrey Lacker, Richmond Federal Reserve Bank President
“The economy is resilient enough to withstand further tightening.” – October 30, 2006 “The economy is resilient enough to withstand further tightening.” – October 30, 2006“The external factors that have in recent years had a dampening impact on domestic inflation could, at some point, fade or reverse.” – October 26, 2006
Even though Mr. Greenspan is retired, the markets still listen, as the greenback closed about 50 points lower against the euro on the date of his comment:
Alan Greenspan, Former Federal Reserve Chairman
“We're beginning to see some move from the dollar to the euro, both from the private sector ... but also from monetary authorities and central banks.” – October 26, 2006
PBOC – Slow and Steady
The issue of trade and the yuan is still alive and kicking, but it appears that progress is being made:
Wen Jiabao, Chinese Premier
“A 2004 deal for trade in goods should be fully implemented. And negotiations on trade in service and investment should be accelerated to speed up the process of establishing the China-ASEAN Free Trade Area.” – October 30, 2006
Pascal Lamy, World Trade Organization Chief
“Are they ( China ) playing the game on lowering tariffs or opening up their market? Yes. They have done the work they pledged to do. In a country with 1.3 billion inhabitants, does every municipal authority or every border post follow the rules to the letter? Maybe not.” – October 30, 2006
Tang Xu, Director of the PBOC's Research Bureau
“In the process of foreign exchange regime reform, the local currency still faces strong appreciation pressure. The latest discussion with the World Bank and IMF indicates this pressure.” – October 26, 2006“The US has adopted a structural restriction policy ... and this is the fundamental reason behind the Sino-US trade imbalance.” – October 26, 2006
Wu Xiaoling, PBOC Deputy Central Bank Governor
“To deepen financial reforms, we must make interest rates more market-orientated and make the exchange rate more flexible…The central bank will steadily push forward the process to make interest rates more market-orientated, including simplifying the maturities on deposit and lending rates, and will make preparations to abolish limits on the spreads between lending and deposit rates…China is gradually reducing the currency basket’s role in managing the yuan exchange rate.” – October 24, 2006
Fan Gang, Advisor to the PBOC
“If China keeps the current foreign exchange system, China 's yuan will depreciate along with the US dollar, which means the slide in the dollar rate won't generate huge losses for foreign exchange reserves denominated in dollars. The only losses will be against the euro and the yen and those aren't huge risks either.” – October 30, 2006
Serge Abou, EU Ambassador to China
“It is better to take time to do something solid rather than move too rapidly...we are partners so we do not want to destabilize or create problems in China . But at the same time, we want to see some progress - every day, every month, every year - going towards more flexibility.” – October 25, 2006