Global economy
Inflation and interest rates UK Consumer prices in the UK are running ahead of the upper 3% limit at 3,7%. At the same time the economy is in poor shape. The consensus for Q4 GDP numbers was a GDP gain of 0,5%. But the number came out at a decline of 0,5%, which is the first decline since the 3rd quarter of 2009. Eurozone The ECB is looking for a maximum of 2% inflation over the medium term – inflation is currently running at 2,2%. The ECB is more “hawkish” on inflation – i.e. it has a long history of trying to supress inflation through the use of higher interest rates. In some respects this history goes back to the hyperinflation experienced in the Weimar Republic of Germany between 1921 and 1923. Nevertheless, given the very weak economy, the ECB is not likely to start increasing interest rates in 2011. The US The US targets core PCE (personal consumption expenditure), instead of headline consumer price inflation. Because this core PCE excludes food and energy components, it places the US Federal Reserve on a current good wicket, as all the price pressure is coming from The US Federal Reserve is likely to hold interest rates at on-going low levels for now, with core inflation running at around 1%. The US Federal Reserve is meeting today and tomorrow. It is unlikely that there will be any material change in their outlook and interest rate policy. Growth forecasts The IMF released its World economic Report today, with an increase in its global GDP forecast in 2011 to 4,4% from a previous estimate of 4,2%. • US growing at 3% Chinese Reserves In the 4th quarter of 2010, Chinese foreign reserves rose by USD 200 billion. Over the years, these reserves have moved up dramatically, which, because they are not effectively sterilised through the exchange rate (which is the major bone of contention for the US government), they have the effect of inflating Chinese liquidity. Chinese authorities appear to be very blunt about the fact that they will let their currency, the renminbi, appreciate only nominally against the dollar, as they accumulate foreign reserves, thus sustaining their high exports. With on-going massive net exports to the world, especially to the US and Europe, foreign currencies pour into the country. The Chinese central bank then prints renminbi in order to buy these foreign currencies, accumulating foreign reserves, but boosting local money supply. This money supply boost continues to fuel inflation in China. For the time being, despite growing concerns about rising inflation, monetary authorities in general will continue to remain accommodative. This will continue to fuel liquidity, which is positive for risk assets such as equities and commodities. Regards Ian de Lange
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