A week to forget
	International Perspective – June 10, 2002
	Anne D. Picker, International Economist, Econoday

Last Week’s Highlights

Investor confidence took yet another body blow as ugly corporate news trumped ugly political news. Enronitis yielded to Tycosis and is exacerbating investors’ worries about corporate governance and reporting anew. There continues to be a dichotomy between mostly bad market sentiment and mostly good economic data. Investors view earnings reports with skepticism and continue to punish good companies when earnings projections falter. All 13 equities indexes tracked here were down on the week.

Central banks — two raise rates, two don’t…

Two of the four major central banks that met last week raised their key interest rates by 25 basis points. The Bank of Canada raised its overnight interest rate to 2.5 percent. The bank said the economy had recovered more strongly than anticipated since its last interest-rate announcement on April 16. The bank has an inflation target between 1 and 3 percent but tries to stay as close to the 2 percent midpoint as possible. April core inflation rose to 2.2 percent, adding to the Bank’s concerns.

As expected, the Reserve Bank of Australia raised its benchmark interest rate 25 basis points to 4.75 percent. In April the bank, also in a 25-point increment, lifted rates from a 28-year low of 4.25 percent. The Bank is worried that the housing boom combined with strong consumer spending may fuel inflation. The move came just prior to first quarter GDP data, which showed a second straight quarter of 4.2 percent year-to-year growth. The inflation rate, which is now 2.9 percent, remains uncomfortably close to the bank's 3.0 percent ceiling.

Both the European Central Bank and the Bank of England decided to keep borrowing costs unchanged. EMU countries barely grew in the first quarter — up a measly 0.1 percent when compared with last year and up 0.2 percent when compared with the fourth quarter. British growth was up 1 percent when compared with last year (and no change when compared with the fourth quarter).

The ECB, which sets interest rates for countries from Finland to Portugal, left its main lending rate at 3.25 percent. In his press conference that followed their meeting, ECB President Wim Duisenberg suggested the ECB might raise rates soon to contain inflation. But the ECB wants to avoid dampening the fledgling economic recovery by raising rates too soon. While business and consumer confidence both grew in May, unemployment rose in April as manufacturers shed jobs.

The Bank of England’s key interest rate remains at 4 percent — its lowest level since 1964. As in the United States, low rates are encouraging consumers, who fuel two-thirds of the British economy, to borrow and spend more, especially on housing. In May, housing prices soared at a record pace, rising faster than the previous record set in July 1988.