News on Interest Rate & Inflation

USD " ... On Wednesday, the Federal Reserve will be making a monetary policy announcement. After cutting interest rates by 325bp since August, the Fed is expected to pause. With the pause should come hawkish comments that pave the way for an interest rate hike before the end of the year. The debate in the markets right now is whether a rate hike will come before or after the US Presidential elections in November. Currently, Fed fund futures are pricing in a strong likelihood of a September rate hike and the tone of the FOMC statement should shed more light on the Fed’s urgency to contain inflation. Hawkish comments will be positive for the US dollar while neutral comments will be very dollar negative.

GBP " .. The British pound has had a great week due to broad dollar weakness and strong economic data. The UK retail sales report has raised a lot of questions as to how much longer the Bank of England can remain on hold. Earlier this week, Bank of England Governor King warned that inflation could hit 4 percent this year, which is 2 full percentage points higher than their inflation target. The only thing holding the BoE back from raising interest rates now is growth, but if growth is stabilizing, then a rate hike may be just around the corner. Unfortunately there isn’t a lot of data to help the British pound next week. The calendar is relatively light except for a few reports on house prices, the final GDP numbers for the first quarter and current account. "..

EURO " ... The Euro strengthened against the US dollar as producer prices in Germany grow by the fastest pace in nearly 2 years. It is actually a bit surprising that the Euro still responds to stronger inflationary pressures which is nearly a given considering that food and energy prices continue to climb. ECB member Bini Smagh warned this morning that rates will have to increase because if “inflation is left to creep up, the cost of bringing it down later will be even higher.” The focus next week for the Eurozone will be how inflation has impacted growth. The week starts off with the German IFO report, and the service and manufacturing PMI numbers. Then on Friday, we are expecting the retail PMI numbers and current account. This past week, German investor confidence dropped to a 15 year low. The recent drop in consumer spending as well as the threat of an interest rate hike next month should also weigh on business confidence.

by Kathy Lien (DailyFx)

Global Stagflation Ahead?

Nouriel Roubini | Jun 10, 2008

The recent rapid rise in commodity prices – oil, energy, metals and agricultural commodities – is leading to the concern that the ensuing rise in global inflation may be associated with a slowdown of global economic growth if not an outright global recession; i.e. there are rising worries about stagflation, a deadly combination of rising inflation and economic recession.

Indeed, not only inflation is rising in many advanced economies and emerging market economies but there are signs of a likely economic contraction in many advanced economies (the US, UK, Spain, Ireland, Italy, Portugal, Japan). In emerging market economies the rise in inflation has been associated so far with rapid economic growth and economic overheating; but there are worries that the economic contraction in the US and other advanced economies may lead to a growth recoupling – rather than decoupling – in emerging markets at the time when rising inflation is forcing monetary authorities to tighten monetary and credit policies to control rising inflation; so “stagflation lite”, i.e. rising inflation cum sharply slowing growth may soon become a problem also for emerging market economies. So should we worry about stagflation or “stagflation lite”?.. Details