High rates dampen global confidence
June 12, 2008
By Joshua Gallu
Zurich - Confidence in the global economy fell this month as central banks signalled interest rates might be heading higher, according to a survey of Bloomberg users.
The Bloomberg professional global confidence index fell to 21 from last month's 22.7, with respondents becoming more pessimistic in every region.
A level below 50 indicates negative sentiment. The measure had rebounded in the previous two months after hitting a low of 13.1 in March.
Martin van Vliet, an economist at ING Bank in Amsterdam who participated in the survey, said: "There's been a shift in focus to the inflation beast. You can clearly see a co-ordinated verbal response from central banks highlighting the increase in long-term inflation expectations."
Investors increased bets on higher borrowing costs after policy makers from the US, Latin America, Europe and Canada focused on the threat of soaring prices rather than weakening growth.
The European Central Bank (ECB) president, Jean-Claude Trichet, said last week that the bank might hike rates next month, after a report showed inflation hit a 16-year high.
After lowering the key rate by 325 basis points to 2 percent since September, Fed chairman Ben Bernanke signalled this week that borrowing would not get any cheaper.
Policy makers wiould "strongly resist" any surge in inflation expectations, he said, adding that the risk of a "substantial downturn" in the world's largest economy receded last month.
The survey collated the responses of 4 533 Bloomberg users from Vatican City to New York on economic conditions in their region and the world.
Participants in the poll, conducted from last Monday to Friday, were also asked about the outlook for their currencies, bonds, shares and interest rates in the next six months.
US investors, analysts and traders increasingly expect the Federal Reserve to lift rates, with the index rising to 60.4 from 51.3.
Higher rates in the US may herald an end to the dollar's decline. Respondents in Germany, Italy and Spain predict the euro will retreat in the next six months. The dollar has fallen 14 percent against the euro in the past year.
Those surveyed in France, Germany and Spain predict that the ECB will raise rates in the next six months.
France's index jumped the most, to 59.2 from 33.2 the previous month.
Jose Carlos Diez, the chief economist at Intermoney, said: "We're entering a phase of higher interest rates. It won't be abrupt, it'll be gradual."
Record costs for commodities such as oil, natural gas, wheat, maize and rice are driving inflation above central banks' comfort zones, and are replacing the global credit squeeze as the primary concern of policy makers.
Banks and securities firms have posted about $392 billion (R3.1 trillion) in asset write-downs and credit losses, after the collapse of the market for mortgages aimed at US borrowers with poor credit histories.
World stock markets, which rebounded in April, renewed their slide as the US economy faltered. The Dow Jones 600 index has fallen 5 percent since the beginning of the month, and unemployment in the US jumped the most in more than two decades last month.
"It may be that the worst is behind us, but nobody's seeing a pick-up any time soon in financial markets,"said Aurelio Maccario, co-head of European Economics at UniCredit Markets and Investment Banking in Milan. "Markets are still jittery."
"There's been a shift in focus to the inflation beast," said Martin Van Vliet, an economist at ING Bank in Amsterdam who took part in the survey. "You can clearly see a coordinated verbal response from central banks highlighting the rise in long- term inflation expectations."
Bloomberg users were gloomier about stock market performance in the next six months. In the UK, the gauge fell to 25.9 from 31.4 last month.
German-led export growth in the euro region may falter should Asian economies stumble. The Asian gauge for confidence in the global economy fell to 19.4 from 21.0, while the index for the region declined to 31.8 from 37.3.
Bloomberg users in Spain, where the collapse of a decade-long housing boom is undermining economic growth, were the most pessimistic about their national outlook among all the survey participants.
The gauge fell to 2.6 in June after 4.9 in the previous month.
Participants in Brazil remained the most optimistic about their economy, even as the gauge dipped to 76.2 from 86.6.
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