A housing bubble in Switzerland?

The Swiss National Bank (SNB) has been extremely reluctant to increase interest rates, presumably because its currency has been excessively strong. Meanwhile, its forecast for near-term inflation has increased, and the economy has performed reasonably well despite the strong currency (although tourism and exports have recently suffered a bit).

The pressure to increase rates may have ratcheted up a notch with Anne Heritier Lachat, the chairwoman of the Swiss Financial Market Supervisory Authority (FINMA), complaining about the potential for housing bubbles in Switzerland. Lachat cited in an interview that all the key ingredients for a bubble exist: low rates, demand exceeding supply, and the assumption that housing has once again become a safe investment. The direction of SNB monetary policy could get a lot more exciting from here…

China tightening cycle hits its third rate hike

China raised interest rates for the third time in four months as the scramble against inflation continues. For a good accounting of the move and its implications see “China raises rates to battle stubbornly high inflation.”

India continues to fight inflation

The Reserve Bank of India (RBI) hiked interest rates more than expected by 25 basis points to 6%.

The RBI has a laser focus on keeping inflation expectations contained. Although inflation seems to have peaked, the RBI remains worried that it needs to “…end the prevalence of negative real interest rates.”

From today’s statement:

“Inflation remains the dominant concern in macroeconomic management…inflation rates have reached a plateau, but are likely to remain at unacceptably high levels for some months. While prices of food articles, which according to the new series, rose by over 14 per cent in August, are still contributing to the pressure, about two-thirds of the August inflation can be attributed to items other than food articles and products. Notwithstanding slight moderation in August 2010, the headline inflation remains significantly above the trend of 5.0–5.5 per cent in the 2000s. There is, therefore, need for continued policy response to contain inflation and anchor inflationary expectation.”

China is losing its fight against inflation

Reuters reports that a senior Chinese government economist has warned that China will not meet its 3% inflation target. He suggests a 5% target instead. See “China inflation target may be out of reach: economist.”

It is also interesting to read that China feels constrained by the monetary policies of its trading partners:

“Ba Shusong, another senior researcher at the DRC, said the central bank would likely be cautious in raising interest rates, preferring instead to use quantitative tools, such as open market operations and required reserves, to manage liquidity.

“The ultra-low interest rate policy stance adopted by the United States and some other countries actually give China very limited scope to raise interest rates,” Ba told the forum.”

China’s surprise rate hike triggers selling in stocks and commodities

Apparently following through on promises to control liquidity and property speculation in the Chinese economy, China’s central bank raised interest rates on three-month bonds. The move surprised financial markets and various commodities and Chinese stocks promptly sold off on the news. However, disagreement exists over whether this move is a special action in response to a recent surge in reserves or whether this is the start of a protracted fight against inflation. From Reuters:

“The move, which was accompanied by the biggest weekly net drain from money markets in 11 weeks, prompted concerns that the central bank could be getting ready to use more forceful measures to cool growth and fight inflation, such as raising benchmark lending rates…

…analysts said the move should be seen more as an effort by the People’s Bank of China (PBOC) to even out the flow of liquidity into the system, in particular to press banks not to repeat the start-of-the-year rush to lend that marked 2009.”

Reuters also quotes a skeptical Robert Rennie, chief strategist for Asia at Westpac Banking Corp in Singapore:

“Over the past eight months, the PBOC’s assets, or its reserves, have risen by around 1.6 trillion yuan ($234 billion) while its liabilities — bills, bonds, repurchase agreements and reserve requirements — were roughly unchanged…So the fact that the PBOC has drained 137 billion yuan and raised rates by 4.04 bps suggests they are moving to withdraw some of this very rapid rise in liquidity…But it is very hard to describe this as a tightening in my view.”

Reserve Bank of Australia Takes First Proactive Steps to Tighten Monetary Policy

Tonight, the Reserve Bank of Australia (RBA) took the first step of any country in the G20 to actually raise interest rates: “…the Board decided to raise the cash rate by 25 basis points to 3.25 per cent, effective 7 October 2009.” For those of us on inflation watch, this action is an encouraging sign that some central banks remain serious about protecting the value of their currency.

The RBA did not raise an alarm about inflation. Instead, it noted that easy monetary policy is no longer needed in Australia: “With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board’s view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy.” The RBA noted three main encouraging economic signs:

  1. “Economic conditions in Australia have been stronger than expected and measures of confidence have recovered.”
  2. “Unemployment has not risen as far as had been expected.”
  3. “Housing credit growth has been solid and dwelling prices have risen appreciably over the past six months.”

The Australian dollar has appreciated 22% this year, making it one of the strongest currencies versus the U.S. dollar. The RBA took this rise into consideration in deciding to raise rates: “The exchange rate has appreciated considerably over the past year, which will dampen pressure on prices and constrain growth in the tradeables sector.”

Of course, interest rates are coming off 40-year lows, but it seems as though Australians can trust in the value of their money for some time to come.