Bank_Research_Consensus_Weekly_07.05.11_body_BankResearch.png, Bank Research Consensus Weekly 07.05.11

Wage Growth and the MPC: Not Enough for an August Rate Rise

Melanie Baker, CFA & Cath Sleeman, Morgan Stanley

Inflation expectations and wage growth are very important variables in determining whether the MPC will meet its inflation target: Inflation expectations and wage growth are seen by the MPC as a major factor in determining whether inflation will remain above target. From the most recent Inflation Report [our italics]: "Inflation will also depend on the balance between two... countervailing forces... to the upside, the protracted period of above-target inflation may lead to further upward pressure on prices, if households and businesses come to expect elevated inflation to persist, or if the recent and prospective squeeze on households' real incomes leads to higher pay growth".

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ECB Preview: This is Not the Last Hike

Frank Øland Hansen, Senior Economist and Anders Møller Jørgensen,Analyst, Danske Bank

Following the hawkish statements both at and after the ECB meeting in June, a 0.25% interest rate hike on Thursday should be a done deal. At the June meeting, Jean-Claude Trichet used the “strong vigilance” code words to signal a rate hike.

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ECB Likely to Hike Rates

John E. Silvia, Chief Economist, Wells Fargo

The European Central Bank (ECB) holds its regular monthly policy meeting on July 7 and most analysts, including ourselves, look for the ECB to hike rates. If the ECB follows through, it would be the second 25-bps rate hike since April. The move was telegraphed at last month’s policy meeting when ECB President Trichet said “strong vigilance is warranted” in regard to the outlook for price stability. In the past, policymakers have used the phrase “strong vigilance” to indicate that a rate hike was imminent. The 2.7 percent CPI inflation rate is above the rate that the ECB considers desirable, making another rate hike more likely.

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Canada – A Look Back At The First Half Of 2011

Derek Burleton, VP & Deputy Chief Economist, TD Bank Financial Group

At the mid-year point of 2011, the performance of Canada’s overall economy and financial markets can only be characterized as disappointing, especially after the terrific start to the year. Rewind back to March, when investors had wondered if their year-end targets for 2011 were too conservative. In particular, equity markets posted a 6% advance in the first three months of the year alone. Supported in part by rising commodity prices, the Canadian dollar gained 5 cents, reaching US$1.05 by the end of April. And the fact that core inflation remained at an ultra-low rate of 1.3% during the first quarter kept government bond yields well anchored.

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Compiled by David Song, Currency Analyst