By Anne D. Picker, International Economist,Econoday
Monday, March 25, 2002

Equities markets followed here were lackluster as investors digested more positive economic news and prepared themselves for a first-quarter earnings season that is virtually upon them. Once the no-surprise FOMC meeting was over market players immediately went into their next phase - trying to decide when the Fed will begin to raise rates and by how much. Equities market players fretted about the impact of higher interest rates on earnings, even though when and how much rates climb are purely a matter of conjecture right now. Five of the indexes followed here rose on the week while the remaining ended the week on the downside.

Sweden became the world's first advanced industrial country to raise interest rates since the September 11 attacks. The Riksbank increased its key interest rate from 3.75 to 4 per cent. The Bank said it was concerned that inflation, stubbornly high in recent months, would remain above its 2 percent target. Sweden's underlying inflation was 3.3 per cent in February. The Riksbank was joined by the Reserve Bank of New Zealand, which also increased borrowing costs based on the global economic rebound.

The Federal Reserve, the European Central Bank and the Bank of England all have signaled that the rate cutting cycle is probably over. But neither the ECB nor the Bank of England appear to be in a hurry to raise rates. The ECB's key rate has been 3.25 percent since November because the inflation outlook is benign enough for rates to be on hold even though the CPI is above the ECB's 2 percent ceiling. In Britain, pressure for an early rate increase diminished when official data showed that annual retail price inflation had fallen from 2.6 per cent in January to 2.2 per cent last month.

The Bank of Japan's Monetary Policy Board left both key interest rates and monetary policy unchanged as expected. Bank governor Masaru Hayami continues to resist political pressure to ease and instead continues to try to force the government to clear trillions of yen of bad loans that are blunting attempts to revive lending. Politicians' calls for easier credit highlight the problems facing Japan. A year after lowering rates to close to zero and pouring trillions of yen into the money market, the Bank of Japan is running out of options to revive the economy. The bank will probably sit tight until Prime Minister Junichiro Koizumi spells out more concrete solutions to tackle an estimated 37 trillion yen of loans that aren't being repaid.

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