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Rebellion Against the Banks?

Rebellion Against the Banks?

Global Economics Weekly Brief

Each central bank governor has a different set of circumstances, but their approaches to signaling future rate decisions are poles apart.
Mervyn King, governor of the Bank of England, vehemently stresses that each monthly decision is made on its own merits and won’t be drawn on his views of when rates are likely to rise. At the other end of the spectrum is the ECB President, Jean-Claude Trichet, who uses phrases that have been ascribed code-word status by observers. This week saw the return of the phrase “strong vigilance” in his comment on the ECB’s stance on inflation. As a result expectations of a hike in the Eurozone rate next month have soared. Watch this space for new interest rate rises very soon! Rebellion? Banks?

Eurozone inflation edges further above target. In February the preliminary estimate of Eurozone inflation reached its highest rate since October 2008. At 2.4%y/y this is now uncomfortably above the ECB inflation target of “close to but below” 2.0%. And developments in oil and commodity markets mean more price increases look likely. This has spurred the European Commission to raise its forecast for Eurozone inflation this year to 2.2% from 1.8%, although it believes that inflation will be close to target by the end of the year. Inflation on the rise in 2011 rapidly!

European Central Bank beginning to sharpen its knives. Rebellion Against the Banks? The ECB kept rates at the record low of 1.0% at its March meeting, but signalled that a move may come sooner rather than later. President Trichet warned that risks to price stability had increased and urged “strong vigilance”, historically a phrase used to signal a rate increase is very much on the cards, rebellion aside. The upside risks to inflation have come along with continued progress in the Eurozone recovery. Growth was confirmed at 0.3% in Q4 (supported by strong trade performance), and ECB staff have raised their GDP forecasts for the next two years.

Surveys of economic activity confirm solid recovery in the Eurozone. The final PMI composite index rose to 58.2 in February, its highest reading since July 2006 (a reading above 50 signals expansion). Service sector PMI rose to 56.8 from 55.9 in January, but manufacturing was the real driver of Eurozone growth. Manufacturing output accelerated at its fastest pace in ten years with the PMI hitting 59 (up from 57.3 in January). Solid export growth is behind the continuing recovery, albeit led by the strong German and French economies. Unfortunately input costs and output prices rose at record rates across the Eurozone too, adding to pressure on the ECB to raise interest rates.

Surveys suggest that UK manufacturing is still doing well (is it?), but the service sector is slightly disappointing. The manufacturing PMI survey stayed at its record high of 61.5 in February. This confirms that the UK economic recovery is still ongoing, sustained by both domestic demand and export growth. Particular comfort comes from the survey’s comment that job growth in the manufacturing sector reached a new high. In contrast service industry output was a little disappointing. The PMI still showed expanding output, but the reading dropped to 52.6 in February, down from January’s eight-month high of 54.5. Inflationary pressures are building in both the manufacturing and service sectors as output prices and input costs, particularly energy and commodities, continue to rise. Rapid rise in fuel prises and profiteering!

Mixed messages on UK house prices in February, but prices are still lower than last year. House prices rose by 0.3% in February according to Nationwide, but fell by 0.9% according to Halifax. On an annual comparison both lenders report a fall, averaging at -1.5%y/y. The average house price in the UK is now about £162,000. But the real story is remortgaging. As more households chose to fix their mortgage rates ahead of expected rate rises, the number of approvals for remortgaging rose by 6% on the month. This is well above the six-month average but, by historical comparison, it is still very low. At 33,500 this is only 41% of the ten year average. Where are the new first time buyers? There are none!

The ISM survey of US business activity showed the recovery gaining pace. In the USA manufacturing output accelerated at its fastest pace in seven years. The Institute for Supply Management (ISM) index increased to 61.4 in February, from 60.8 in January. New orders, exports and employment all helped. But the best news was in the non-manufacturing sector, which brought in an unexpectedly high reading of 59.7.

The US unemployment rate fell to 8.9%, its lowest in nearly two years. Even though the government slashed 30,000 jobs, the private sector created 222,000. This is very encouraging for the US which has been plagued by stubbornly high unemployment. But there is still a lot of ground to recover. With 13.7m people jobless, unemployment is still almost double the pre-crisis levels. Many part-time jobs created not full-time!

How Banks get rich on low interest rates

Banks have and will continue to squeeze an extra £1,700 each from customers since interest rates were cut in 2009 with higher interest charges on mortgages, credit cards and loans and low returns on deposits. We are `all` being taken for a ride, rebellion or not, by the banks at our expense to increase banks profits, bankers very high salaries and bonuses and shareholder dividends. (Barclay`s Chief Executive Bob Diamond’s bonus, salary and shares for 2010=£20Million). Why do governments and customers allow this `cut throat` practise to continue?

Will there be a Rebellion Against the Banks be coming soon in every country by the people who are being fleeced by these banks?

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Weekly Economic Update focusing on the potential Rebellion Against the Banks.

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