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Economy in Brief

Central Banks in Many Countries Raise Base Rates
by Carol Stone June 8, 2006

It was expected that the ECB would raise its refinancing rate at today's scheduled meeting, and indeed the Governing Council lifted it to 2.75% from 2.50%. However, what was not at all expected were similar kinds of moves by central banks around the world. South Koreans moved their overnight call rate target from 4.00% to 4.25%, the Reserve Bank of South Africa raised their repo rate by half-a-percent to 7.50%, and the Reserve Bank of India pushed its reverse repo rate to 5.75% from 5.50%. Some countries have been raising rates for some time, but for South Africa, this was the first increase since 2002. Turkey, which has made such decisive progress getting its rates down, was actually the first to move, on Wednesday, when it raised its rate from 13.25% to 15.00%.

Inflation, which had behaved in such an encouraging way for a long time, has now started to pick up, as we discussed here yesterday with Austria's wholesale prices. Tom Moeller also covered the phenomenon yesterday in showing the "TIP spread" and the University of Michigan's consumer sentiment survey. In the latter measure for May, consumers anticipate inflation over the next year of 4.7%, up from 3.8% in January. At the same time, economies that had been weak, have gained strength, especially across Europe and in Japan. Last week, India reported a 9.3% rate of growth for Q1.

So central banks are trying to keep "ahead of the curve" on these issues, and the simultaneous action by so many on a single day is impressive. Indeed, bond markets reacted positively; German 10-year government bond yields, for instance, dropped in yield from 3.98% to 3.90%, a substantial one-day move. Such an endorsement should be gratifying to inflation-fighting central bankers.

  June 8 May Dec 2005 Dec 2004 Dec 2003 Dec 2002
ECB 2.75 2.50 2.25 2.00 2.00 2.75
South Korea 4.25 4.00 3.75 3.25 3.75 4.25
India 5.75 5.50 5.25 4.75 4.50 5.50
Turkey 15.00 13.25 13.5 18.00 26.00 44.00
South Africa 7.50 7.00 7.00 7.50 8.00 13.50
Thailand 6.50 6.25 5.50 3.50 2.75 3.25
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