Previewing Upcoming Central Bank Policy Meetings

April 9, 2008

Central bank interest rate policy meetings are being held this week in Japan, Britain and the euro area. Word will arrive in a few hours from the Bank of Japan that its overnight money rate target is remaining at 0.5%. The target was lifted from zero to 0.25% in July 2006 and just one time further to 0.5% in February 2007. Non-energy, non food consumer prices fell 0.1% in the year to February, but more importantly central bank officials will probably lower their appraisal of economic growth for a second straight month to trendless.

Thursday is double-feature day. I expect the Bank of England to cut rates by 0.25% to 5.0%, following up on 25-basis point reductions last December and February. Any remaining doubt about a third cut now was removed by the latest Halifax house price index report, which fell in March by 2.5% from February and by 1.1% in March. This index registered 12-month increases of 4.2% in February and 11.4% last August when global financial turmoil began. The European Central Bank (ECB) has not begun to reduce interest rates yet and is unlikely to do so before 4Q08 at the earliest — not with CPI inflation currently at a record high of 3.5% and lending to non-financial corporations showing strataspheric 12-month expansion of 14.8%. The ECB is the last bastion of monetarism, the view that inflation is a monetary phenomenon, that money demand behaves in a stable and predictable fashion over the long run, and that a cause and effect relationship between money growth and inflation therefore exists in the long run. ECB officials worry that the ongoing prolonged period with inflation well above the target ceiling of 1.9% may foster excessive wage demands and awards. The German Bundesbank President Weber recently expressed displeasure with a recent labor contract won by public-sector workers. A 4.0% ECB financing rate represents an unusually small 0.5% premium over CPI inflation. The ECB’s concession to the global credit crunch and declining European growth is not to rate rates further, but outright rate cutting is out of the question for now.



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