NEWS / Foreign Exchange

Oil is inflation threat

Oil is inflation threat

Rising oil prices are the biggest inflationary danger in a euro zone economy that is enjoying favourable growth, European Central Bank policymakers said on Monday, adding to expectations for another ECB interest rate increase.

Monetary conditions, even after seven interest rate increases since December 2005, still support economic growth in the 13-nation region, Governing Council members Christian Noyer and Klaus Liebscher also said in separate speeches.

So far inflation has remained under control despite an oil price shock the last few years, but ECB policy-makers fret that healthy growth, which remains above trend for a second year in a row, could create conditions for consumer prices to rise.

Euro zone inflation currently is 1.9 %, below the ECB's 2 % ceiling for the seventh month, but is expected to head higher later this year. Liebscher, speaking in New York, also cited rising oil prices, up about 25 % since mid- January, along with wage settlements that exceed inflation and productivity gains as potential inflationary dangers.

Bank of Japan raising rates to desirable level, Fukui says

Bank of Japan Governor Toshihiko Fukui said on Tuesday that keeping interest rates too low could hamper long-term economic growth, signalling the need to continue raising Japan's still-low interest rates gradually.

"Monetary conditions remain very accommodative even after the decision" in February to raise the central bank's key policy rate to a decade-high 0.5 %, Fukui told a lower house committee on financial and monetary affairs.

Keeping interest rates at a level that does not reflect economic and price conditions will lead to resources being used inefficiently and could prevent the economy from achieving sustained growth, he said.

"Japan has emerged from a decade of difficult times and we are still in the midst of adjusting interest rates to a level that is truly desirable," Fukui said.

"The BOJ is in the process of raising rates gradually, albeit very cautiously," he said, reiterating that the central bank will guide monetary policy appropriately by closely examining economic and price conditions. The BOJ has kept rates on hold after raising the key overnight call rate to 0.5 % from 0.25 % in February on the view that the economy is expanding with rising prices.

Yen selling pauses but more weakness in store

The yen hung near a record low against the euro and a seven-week trough versus the dollar on Tuesday and was expected to stay pressured after the Group of Seven appeared to give a green light for yen selling. The euro traded around 161.85 yen, not far from an all-time high 162.43 yen touched on Monday, when the yen tumbled across the board after G7 finance officials at the weekend glossed over the issue of the yen's recent weakness.

The high-yielding Australian dollar traded just below 100 yen, a level last hit 10 years ago, while the New Zealand dollar hit its highest against the Japanese currency in roughly 17 years on Monday.

Analysts expect the yen will keep struggling as investors dump it for higher-yielding currencies and assets as part of trading strategies such as the carry trade. They added that the euro will continue to climb on the view that the European Central Bank may raise rates in June and beyond.

This view helped the euro to stay strong against the dollar, which traded around USD 1.3530, little changed on the day and hovering near a two-year high around USD 1.3570 hit on Monday.

EUR/USD traded between 1.3525 and 1.3543. EUR/JPY traded between 161.73 and 162.10.rate speeches.