PBoC hiked yesterday, ECB will do the same today

illustration: asian lamps

(07.07.2011) The Chinese central bank hiked interest rates by 0.25%-points yesterday. It is expected that the ECB will do the same today, despite the fact that markets are worried about debt crisis.

By Knut A. Magnussen, Senior Economist at DNB Markets

China’s rate hike yesterday was the fifth since October last year and came as no surprise to the markets. Both the one year deposit and lending rates were hiked by 0.25pp. to 3.5% and 6.56% respectively. The hike shows that the authorities are continuing the tightening process and are still worried by the high inflation. It is expected that inflation will raise to more than 6% in June (data due next week).  
Today there are rate meetings in ECB and BoE. It seems obvious that ECB will lift the refi rate from 1.25% to 1.50%. Strong signals were given at the previous meeting and have been repeated by Trichet recently. A hike will come despite the continued debt crisis which is dampening markets. Most European stock markets fell somewhat yesterday, so did the euro while the ten year Italian government bond yield rose to more than 5%. Obviously Mr Trichet will get many questions regarding the debt crisis at today’s press conference. In the UK it seems more topical to discuss further stimulus (QE2) that rate hikes. 
Yesterday there was a meeting among large European banks to discuss participation in the new Greek rescue package. Talks were based on the French proposal for a rollover into new 30-year bonds, with a demand of a 20% that Greece will have to reinvest into Eurpoean AAA bonds. The bonds would have an interest rate up to 8%. Possible adjustments of this plan were discussed but no consensus was reached.

Furthermore German officials repeated their call for a bond swap pushing holders to swap existing bonds into new ones with a maturity extension. The EU-commission leader Barroso and the Portuguese government were (not surprisingly) negative to the sharp downgrade by Moody’s of the Portuguese government debt. The minister of finance (Gaspar) said that the rating agency had not taken into account the new austerity measures and the fact that there is a broad political consensus on the need for these measures. Moody’s took the rating down four notches to “junk” arguing that there is a large risk of a need for another rescue package also for Portugal.

Elsewhere in Europe the troika (EU, ECB and IMF) yesterday started its third evaluation of how Ireland has fulfilled its obligation in the 84 bill. Euro rescue loan.
The Irish government seems eager to renegotiate the terms of the agreement.
German industrial orders surprised on the upside in May, growing by 1.8% in May. A drop of 0.5% was expected in advance. Orders were lifted by the domestic market, growing by an impressive 11.3%, while export orders fell by almost 6%. Taken into consideration the high volatility of the data, the upward trend seems to continue, pointing in direction of further strong growth in German manufacturing going forward. Today the production data for May will be released and a moderate increase is expected.
In the US the Congress will resume talks on the debt ceiling today. President Obama urges the party leaders to reach a solution, but there is still no agreement in sight. Democrats are still in favour of higher taxes while the republicans are opposed to any increase in the tax level. According to Reuters the Treasury department is now discussing strategies to avoid a debt crisis if the parties fail to agree by August 2. The ISM for non-manufacturing sectors fell somewhat in June but still seem to have stabilized at a level consistent will moderate GDP-growth after having fallen in the spring. Today the ADP-report is due. The report will give indications of what can be expected in the payrolls report tomorrow.