Global interest rates need to rise as an economic recovery gathers momentum and central banks act to prevent inflation from accelerating, officials from the U.S. Federal Reserve and the Bank of England said. The Swiss central bank unexpectedly increased borrowing costs today. ``We're clear that we need for rates to move up,'' Federal Reserve Bank of Richmond President J. Alfred Broaddus Jr. said in an interview in Washington yesterday. ``I do not believe we are behind at this point.''
Accelerating inflation and evidence that a global economic recovery is gaining momentum have boosted investor expectations of higher interest rates this year. The Fed will at least double its 1 percent interest-rate target for overnight loans between banks by year-end, a majority of economists at Wall Street's largest bond-trading firms said last week. The Swiss National Bank raised interest rates for the first time in four years as the economy recovers from its first annual contraction in a decade in 2003. the bank increased its three- month Libor target by a quarter point to about 0.5 percent. ``A synchronized recovery in the industrialized world is now under way,'' Bank of England Governor Mervyn King said in the text of a speech at the Mansion House annual dinner in London late yesterday. ``Over the past three months, expectations of interest rates among all the major industrial countries have risen as the recovery has become more firmly established.''
U.K. Rate Outlook
The Bank of England has increased borrowing costs four times since November to counter accelerating inflation. Signs that higher rates have failed to deter consumers from borrowing and spending will prompt the U.K. central bank to raise rates again in August, most economists surveyed by Bloomberg News predict. U.K. retail sales rose 0.8 percent in May after a 0.3 percent advance the previous month, a report from the government statistics office showed. Sales jumped an annual 7.4 percent last month, compared with a 5.8 percent annual gain in April. The comments by Broaddus and King show ``they want to validate what the market is pricing in terms of rate hikes, but they don't want the market to get ahead of itself,'' said Rajeev de Mello, who manages the equivalent of $7.6 billion in European bonds at Pictet & Cie. in Geneva. ``What they don't want is the situation we had in 1994, when the market priced in 200 basis points more than what the Fed actually did.''
ECB Expectations
Even in the 12-nation euro region, where economic growth is lagging that of the U.S., the U.K. and Japan, an increasing number of investors predict a rate increase before the end of this year, futures trading suggests. At 2 percent, the ECB's benchmark refinancing rate is still double the Fed's main rate. The implied rate on the Euribor three-month rate futures contract for December delivery has risen to 2.52 percent, up from 2.10 percent at the start of April, and compared with a three- month money market rate of 2.12 percent. The ECB this month raised its inflation forecast for this year and next after rising oil costs boosted the pace of price increases above its 2 percent limit. The Frankfurt-based ECB hasn't touched interest rates since June of last year. In Japan, the central bank is keeping interest rates close to zero until there are signs that deflation in the world's second- biggest economy is coming to an end. The Bank of Japan said this week the economy is ``gathering stronger momentum.''
FOMC Meeting
The Fed is expected to raise the benchmark lending rate by 25 basis points to 1.25 percent when the Federal Open Market Committee next meets on June 30, based on the median forecast of 130 economists surveyed by Bloomberg. The Fed hasn't raised its benchmark interest rate, at a 46-year low, since May 2000. Jack Guynn, president of the Fed's branch in Atlanta, told the Consumer Banking Association in Bonita Springs, Florida, yesterday that the Fed is ``several hundred basis points behind what would be a more normal policy setting.'' A neutral Fed target rate ``is something in the vicinity of 2.5 to 3.5 percent,'' Broaddus later told an audience of money managers in Washington. ``But many things can affect what `neutral' is -- it is always difficult to answer with precision.''
Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co., said in an interview with the Financial Times today that the outlook for the global economy is the most uncertain for between 20 and 30 years.
Tackling Inflation
``Too much debt, geopolitical risk and several bubbles have created a very unstable environment which can turn any minute,'' the FT cited Gross as saying. Central bankers have staked their reputations on making sure inflation will remain contained, Broaddus said. Price stability is a main goal because it sets the stage for sustainable growth, he said.
``We now have credibility for low inflation, and we aren't about to give it up,'' Broaddus said in a speech in Washington yesterday. ``The Fed will have the time needed to identify emerging inflation or deflation risks and effectively contain them.'' Inflation is also becoming a concern for central bankers in Europe. The ECB said in its monthly report for June last week that oil costs may keep inflation above its 2 percent ceiling for ``longer than just a few months.'' ///www.bloomberg.com