« The distribution of bonds, Thurs., Oct. 20, 2005, 9:51 AM | Main | Canadian bonds in depressing state, Thurs., Oct. 20, 2005, 10:54 AM »

October 20, 2005

The Hawk Effect of central banks, Thurs., Oct. 20, 2005, 10:40 AM

Last week there was a convening of the central bankers and finance ministers of the G-20 wealthiest nations in China. While in China, I presume there was some jaw-dropping by authorities of 19 other countries. Surely the economic expansion of China, growing at an annual rate of +9.4 pct over the first three quarters of the year, must have been a hot topic at those meetings.

So the take-away is that these nations put out a tremendous amount of PR that interest rates were going to be hiked world-wide, which would presumably make it harder for China to borrow the funds needed to fuel its expansion at the same rate.

And with the recent PPI and CPI reports in the U.S., there were a lot of believers. Many traders actually took to heart that monetary policies just might tighten further here. So there has been a Hawk Effect playing out.

Yes, that PR was designed to scare oil and gold traders, and prices did come off, for now.

The problem I have with that scenario is that central banks cannot raise too quickly or else they could lead the world into a massive sell-off of real estate by owners who can no longer properly service the debts. That scenario would set off a whole series of problems.

Rates will rise, of course, because there is a cost-push stimulus. In some of the more prudently managed countries, like Canada for instance, there is an overly robust economy that the central bank wants to slow.

So, moments ago, the Bank of Canada issued its Monetary Policy Report calling for much higher interest rates for at least the next year. Of course having just raised its overnight lending rate to the commercial banks by +25 bp to 3.00 pct, the BOC is well behind the rate increases of the U.S., which took the comparable rate to 3.75 pct, and soon to be 4.00 pct.

I'm betting on the Fed's inability to walk the same talk.

Posted by Posted by Bill Cara on October 20, 2005 10:42:07 AM | Category: Bonds , Canada