European Central Bank head Jean-Claude Trichet tells The Wall Street Journal that higher interest rates may be near. He’s not alone when it comes to considering a tighter monetary policy.
The Reserve Bank of India may be close to hiking rates as well, according to The Economic Times. There are also signs that the Bank of England is in the same monetary boat. China too has been tightening lately and the country may be heading for another round. Speaking of hikes, Hungary’s central bank announced one today.
The common catalyst: worries of higher inflation. Or, as Trichet says via the Journal today: “All central banks, in periods like this where you have inflationary threats that are coming from commodities, have to…be very careful that there are no second-round effects” [on domestic prices].
In the U.S., official inflation measures are still quite low by historical standards, as shown by rolling one-year percentage changes in headline and core consumer price indices in the chart below. But nothing lasts forever, even if it’s tempting to think that low rates are here to stay.
“By the middle of the year, the economic momentum will be building, and all the hawks are going to be crazy about tightening,” says Larry Meyers, a former Fed governor who now heads up Macroeconomic Advisers.
Perhaps, but there’s still no sign of inflation worries in the Treasury market. The implied inflation forecast, based on the yield spread between the nominal and inflation-indexed 10-year Treasuries, for instance, is in the low-2% range, or roughly where it’s been since late last year.