US GDP estimates for Q4 2006 have reinforced US optimism. As expected, the
Fed kept its funds rate at 5.25% on 31 January. The accompanying statement was
neutral and mentioned improved readings on core inflation, but added “some
inflation risks remain”.
However, interest rate perceptions have hardened and forecasts of early Fed
easing have been abandoned. The market consensus still predicts a modest cut in
rates this year to 5%, but any cut is unlikely before the second half of 2007.
Many now think that the Fed funds rate may stay at 5.25% throughout 2007. Some
even talk about a further increase in US rates in the next few months.
The eurozone economy is gradually improving. The ECB is in a hawkish mood, even
though inflation is below 2%. As expected, the ECB kept interest rates at 3.50%
on 8 February. But ECB President Trichet used the critical words ‘“strong
vigilance” and this has reinforced prospects of a further rate increase to
3.75%. A final increase in ECB rates later in the year, to 4%, cannot be ruled
out. The UK left Bank rates at 5.25% on 8 February. But a further increase, to
5.50%, is likely before June.
The Bank of Japan (BoJ) decided to keep its key interest rate at 0.25% in
January, following warnings from top government officials not to raise rates too
quickly, so as not to threaten the frail recovery. Since it was known that many
BoJ executives wanted to raise rates, the decision weakened the yen further and
added to fears that the BoJ’s political independence may be threatened. In spite
of the pressure on the BoJ to delay tightening, the markets expect official
Japanese interest rates to go up in the next couple of months.
As the US delays easing, and Europe and Asia push up rates, many fear that
the recent abundance of global liquidity could give way to a credit crunch. Risk
is ‘mispriced’, in the sense that risk spreads are too low, because of excess
ive appetite for yield. Low interest rates have encouraged investors to borrow
cheap Japanese yen to undertake ‘carry trades’. However, an abrupt unwinding of
large ‘carry trade’ yen positions could endanger stability. There are also
concerns over the opaque nature of derivatives and the increased role of hedge
Cambridge-based Frontier Developments has appointed Alex Bevis as its next finance chief
Some of the UK’s top companies are failing to adequately report poor performance and sometimes obscure their true profit figures
Chartered accountant Colin Adams rebuilt the AIM listed company’s finance team and helped turn the business around after a challenging period