ECB Laying the Groundwork
US Fed Ignoring the Elephant in the Room
BOJ Mounting Evidence
ECB Laying the Groundwork
Central bankers in the Euro-zone have left little question that a December hike to 3.50% is in the cards:
Jean-Claude Trichet, European Central Bank President
In fact, at that time the signals coming from the economic analysis were not yet so strong. But the continued expansion of money and credit through the course of 2005 gave an intensifying indication of increasing risks to medium and long-term price stability. November 10, 2006
Nout Wellink, European Central Bank Governing Council Member
Mr. Wellink said interest rates in Euro-zone are still "damn low" and "the underlying tendency is still an inflation rate above 2 percent. It is our firm intention to bring it again below or close to 2 percent." November 14, 2006
Lorenzo Bini Smaghi, European Central Bank Executive Board Member
It is obvious that with an economy growing at the current pace, and with an (expected) inflation of over 2% in the coming months, an interest rate at the current level, 3.25%, risks being inadequate. November 9, 2006
Guy Quaden, European Central Bank Governing Council Member
Mr. Quaden stressed rising interest rates do not reduce growth and that a rate of 3.25% certainly doesn't slow economic activity. Mr. Quaden added that the recent deceleration in headline inflation was due to lower oil prices, which are unlikely to continue and that the central banks job is to keep inflation under control. November 10, 2006
Axel Weber, European Central Bank Governing Council Member
The signals coming from both pillars of our strategy have been showing for a long time that the ECB's monetary policy is expansionary. November 10, 2006
US Fed Ignoring the Elephant in the Room
Central bankers are still focused on inflation risks while opting to brush off recent disappointing US reports:
Jeffrey Lacker, Richmond Federal Reserve Bank President
The <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />US Federal Reserve has failed to express forcefully its desire for lower inflation and willingness to take action to achieve this. November 8, 2006
Michael Moskow, Chicago Federal Reserve Bank President
I don't think we're quote 'behind the curve'. Our pause was appropriate. It gives us the opportunity to get more data to assess the situation?the risk of inflation remaining too high is greater than the risk of growth being too low?By my standards, inflation has been too high. November 9, 2006
Janet Yellen, San Francisco Federal Reserve Bank President
Price stability is both a mandated goal and fundamental in the long run to having an economy that is capable of creating jobs. A real limit on what the Fed can do to push unemployment lower and create jobs is the inflationary threat that it can pose. November 7, 2006
While the retired Fed Chairman notes the slowdown, he remains sanguine:
Alan Greenspan, Former Federal Reserve Chairman
The economy is obviously going through a significant slowing period, which as best I can tell is more than likely temporary. November 7, 2006
A lot of people are talking about the economy slowing down and capital investments being pulled back, but (profit) margins in the third quarter startled everybody. For all the talk about the problems, the numbers that are coming in for the third quarter look fairly good. And the underlying structure of capital goods orders ... looks to be fairly solid. November 10, 2006
BOJ Mounting Evidence
Now that Q3 GDP has unexpectedly jumped, central bankers are likely to note that the facts are starting to warrant monetary policy tightening sooner rather than later:
Toshihiko Fukui, Bank of Japan Governor
We don't have a predetermined schedule. Our policy is unchanged: we will make adjustments to interest rates gradually. The BOJ's policy is forward-looking. It's not like we are doing nothing until we see a sign (of higher inflation). If the central bank changed interest rates only after confirming certain inflationary pressures, fluctuations in the economy might become too sharp. November 7, 2006
In our country's case, if the yen-carry trade swelled too much, it might give the foreign exchange market some impact. Therefore, the BoJ is cautiously watching not only the pace of increase of yen-carry trades but also the pace of re-windings of such transactions. November 10, 2006
Kazumasa Iwata, Bank of Japan Deputy Governor
There will be a gradual adjustment in interest rates if the economy is moving along the lines we expect. November 10, 2006
Atsushi Mizuno, Bank of Japan Board Member
If a rate hike by the Bank of Japan is perceived as a surprise, there are high risks for increasing volatility in global financial markets, and for the time being I think it is good for us to adjust rates at a gradual pace. November 8, 2006
Will Mr. Omi change his tune following the Q3 GDP data?
Koji Omi, Japanese Finance Minister
Our thinking is that economic growth and financial consolidation are compatible rather than contradictory. The big picture in Japan is that deflation continues and monetary and fiscal policy are both being tightened...and I challenge you to find any textbook where that is described as an optimal policy mix. November 10, 2006
Al Bawaba
