Intelligentguess

Situation

Prices remained flat in January 2007 as compared to the same month previous year. 
Prices were down 0.2% from the previous month.

The Bank of Japan raised the uncollateralized overnight call rate from 0.25% to 0.50% on Feb 21 2007 ( with a comment that future rate hikes would depend on growth and consumption)

The reason for the rate hike was perhaps caused - more by the high levels of growth in Producer Price Index ( PPI). The PPI has been dropping from high levels in recent months-but- can still have a pull effect on the CPI.  BOJ had been reluctant to raise the rates for quite some time. It looks like the GDP results of 4.8% p.a growth in Q4 2006 ( against a 0.3% p.a in Q3 2006 ) - helped encourage a rate hike

Conclusion

It does look like CPI will remain between 1% to a (-1%) -for now.
As such the BOJ may have a relaxed posture towards raising interest rates( i.e not raise)  in the coming months.

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Situation

Euro area annual  inflation was 1.8% in January 2007, down from 1.9% in December 2006.
However excluding energy prices the CPI was at 1.93% in January 2007 ,up from 1.80% in December 2006.

Prices have dropped by 0.52% in January 2007 as compared to December 2006.
Excluding energy prices the drop was at 0.62% for the same period.

Conclusion

The recent drops in the  Producers Price Index ( PPI) (and the energy prices within it) encourages the possibility that CPI can be expected to remain soft in the coming months.   

CPI can be expected to range between 1.5% to 2% in the coming months. ( click / double click the pic - for the bigger picture )

The Question

The European Commercial bank ( ECB) aims at inflation ( CPI ) rates of below, but close to, 2% over the medium term. They seem to have achived this primary goal for the past two months.  

The possibilities of CPI remaining low in the coming months and prospects of a lower growth rate in Industrial Production   can also be indicative of possibilities of medium term stability.

Therefore - looking at the inflation picture - does the the ECB need to take the step of raising interest rates? ( as was much speculated in the market).

The next monetary policy meeting of the ECB  is scheduled for March 8th 2007.

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Situation

Euro area PPI grew at  2.96% p.a in January 2007, down from 4.05% p.a in  December 2006.
Excluding the energy sector, PPI increased by 3.4% . 

Prices in the energy sector gained 1.2% p.a  in January 2007 , down from 6.8% p.a and 6.2% p.a in November and December 2006

PPI  rose by 0.13% in January 2007 as compared to December 2006. Prices in the energy sector fell by 1.0% in the same period. ( i.e we can expect drops in the coming months CPI in the same sector and possibly )

Conclusion

PPI looks like ranging between 2.5% to 4.0% p.a in the coming months ( i.e remaining in the lower end of its range).
The drop in PPI  - would also have an effect on of a lower CPI in the coming 2-3 months

The Question

With the  :

• Possibilities of a drop in CPI in the coming months
• Lowered rate of growth in New Orders Index in December 2006 and the possibilitis of that effecting the coming months Index of Industrial Production 

Can the ECB raise interest rates in  the coming months ? ( inflation and expectations of production growth cannot be reasons for it to do so)

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The uncollateralized overnight call rate - aka - the BOJ Bank rate ( monthly basis )

 (Source : ESRI & Bank of Japan)

For a larger Visual of the above chart - Click here

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