Latest news on Asian Morning Update 15th May 2008
| Inflation day passes with no cheering crowds? European overnight releases: April Forecast Actual
April Forecast Actual May
It’s fine for ECB and finance ministers to say that they can’t allow inflation to get higher but frankly it’s clearly out of their hands and maintaining interest rates at current levels only has impact when the inflation is internally driven. Indeed, maintaining high interest rates when consumers are stressed out trying to meet their costs within their household budget will more likely provoke a more excessive push to lower growth. We can’t even rule out recession if other price shocks occur along the way. The situation was probably clearly highlighted by the BOE governor King during his quarterly assessment. The outlook for UK inflation has “deteriorated markedly” he said and warned that it hasn’t reached a peak nor would fall below the 2% target rate for at least two years. At the same time house prices are likely to continue their downward trend which the government has revealed could be as much as 10%. The clear sign that he understood the Catch 22 the country (and probably the world) faces was his explanation that if the Bank kept rates where they were, then the outlook for growth was dismal and the UK could be tipped into recession. “The nice decade is behind us” he concluded. From this point forward there is a worrying risk of the slowdown squeezing real incomes and as such “the balance of risks to the outlook for growth is to the downside in the medium term.” The key here is interest rates. The Fed has taken an expansive view and tackled the problem of the turndown in the U.S. economy rather than protect against inflation. However, it is very unlikely that inflation would be any lower if they had retained firmer monetary conditions. It can be argued that the crisis in the States was much stronger. However, the global economy was at a high when the bubble burst and as the rest of the world catches up the level of activity has weakened considerably and this will act as a stronger dampener to growth as inflation deepens its grasp. While inflation is high consumers are being forced to cut back on spending. In other words the traditional demand driven source of inflation is not present. High interest rates will not work in this environment. Indeed, the opposite may well be true. High interest rates will dampen demand further and drive economies into stagflation. Lower interest rates will help retain a modicum of normal demand. The only fly in the ointment would be a more aggressive reaction to the financial stress in which households find themselves – and that would raise the chance of industrial action for higher wages. The U.K.’s winter of discontent as inflation scaled heights above 12% should be a study requirement… The Dollar firmed up on the back of the lower inflation reading as the market sensed that interest rates were not about to be lowered again by the Fed. It hasn’t been a strong rally with recent highs still intact. Clearly the Dollar’s upward momentum is waning and unless there is some new catalyst the risk is turning for a correction to the recovery from its lows…
The following releases are due from Asia due today: Australia Japan See Also
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