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It is not over yet
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Markets around the world are awash in excess cash, fueling a frenzy of investment from London to Tokyo that may lead central banks to push interest rates higher than investors now anticipate.
Money remains cheaper than in the 1990s even after every major central bank raised rates this year, the first simultaneous tightening since 2000. The cash glut is reheating the U.K. housing market, while in Japan companies plan the most investment since 1990. China's biggest bank this month attracted orders for more than half a trillion dollars with its initial public offering of shares.
Without further tightening, central bankers may have new asset bubbles and inflation risks on their hands. The European Central Bank, whose officials voice the most concern, is convening a conference in Frankfurt next week on the role of money growth in guiding interest rate policy. Among participants: Federal Reserve Chairman Ben S. Bernanke, People's Bank of China Governor Zhou Xiaochuan and Bank of Japan Deputy Governor Kazumasa Iwata.
When monetary growth is strong, the housing markets are very dynamic and the stock markets are vigorous, the probability of an inflationary episode within three or four years is very strong.
The ECB, unlike other major central banks, explicitly uses money supply to gauge inflation. Growth of M3, the bank's preferred measure for the 12 nations sharing the euro, unexpectedly accelerated to 8.5 percent in September, close to a three-year high. That added to pressure on the bank to add to its five rate increases since early December.
Money supply on a global basis is growing quite rapidly as is overall credit growth and we don't see much evidence that monetary policy around the world is restrictive.
I expect the ECB to lift its benchmark rate to 4 percent or higher by the end of 2007. The Fed's target rate will reach 6 percent, from 5.25 percent; the Bank of England's will rise to 5.5 percent from 4.75 percent; and the Bank of Japan's will go to 2 percent from 0.25 percent.
My predictions are at odds with futures trading, which suggest most central banks won't raise rates much further, if at all, next year.
Revival of Monetarism
Other central banks including the Bank of England and the Bank of Japan are starting to share the ECB's view on money growth. That's a shift from a few years ago, when following money supply was deemed a relic of the 1970s.
One central bank that isn't joining is the Federal Reserve, which no longer sets a target for monetary growth and stopped publishing one measure of money supply in March.
Risky Investments
Available money is also encouraging ``barely profitable and highly risky'' investments, French Finance Minister Thierry Breton said last month. The average interest rate of 10 leading economies adjusted for inflation is now around 2.8 percent, below the 3.2 percent average of the 1990s, Morgan Stanley estimates.
The Bank of England, which once shared the Fed's skeptical view of money supply as a policy guide, is now grappling with the fastest expansion of money in 16 years. After raising rates a quarter point in August, citing ``rapid growth'' of cash and credit, Bank of England officials are signaling a further quarter point increase when they convene next week.
The rates of monetary growth are worrying and unless reduced relatively soon will represent a significant inflationary pressure.
A significant increase in capital spending plans could prompt the bank to raise rates again this year.
Cheap cash means China may also be overheating. The country last year had 118 million tons of excess steel production capacity, more than the 112 million-ton output of Japan, the world's second-largest steelmaker.
Industrial & Commercial Bank of China Ltd. this month completed the world's biggest initial public offering, raising $19.1 billion and attracting more than $500 billion in orders, equivalent to twice Citigroup Inc.'s market value. |
| Tarih
: 01.11.2006 |
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© 2006 Mert TOKER All Rights Reserved. |
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