Comment: May in Review

COMMENT BY CENTRALBANKNEWS

The Reserve Bank of Australia surprised the markets by hiking rates, Ben Bernanke found himself accused of miscommunication, and the Bank of England's Inflation Report projected the warned-about "bumpy road ahead".

• An alleged "off the record" remark by Ben Bernanke triggered a financial markets frenzy and led to suggestions that his communication is muddled. CNBC anchor, Maria Bartiromo, revealed on Monday, 1 May that Bernanke told her the markets had got the wrong message from his recent Congressional testimony. Bartiromo asked Bernanke if markets were drawing the right conclusions from his speeches at a White House Correspondents Association dinner in Washington on April 29. His answer, she says, was a blunt "no", before adding that it was "worrisome" that he might be perceived as a dove.
• After having made it clear that an interest rate increase was highly unlikely, the ECB's monetary policy meeting in the first week of May was all about signalling future rate hikes. Jean-Claude Trichet's message on 3 May was a particularly hawkish one. Markets took his reiteration of the need for "strong vigilance" as a signal that the first instalment of these hikes will come in June.
• The Reserve Bank of Australia has joined the world's leading central banks in tightening mode. In the first week of May, the central bank unexpectedly hiked rates by 25 basis points - the first rate hike in 18 months. Inflation has been remarkably stable over the last two years, and economists have for some time believed that rates would remain unchanged for the rest of the year. Now that this picture has changed, the question turns to whether further rate increases are likely this year. Judging by the quarterly statement on monetary policy, released on Friday 5 May, another hike is unlikely before governor Ian Macfarlane's retirement in September.
• The Bank of England's May Inflation Report contained mixed messages for future interest rate movements. Under the central projection, inflation rises above the central bank's inflation target of 2% in the near term - i.e. over the next twelve months. However, as energy and import price inflation ease, CPI inflation falls back to around the target by the second half of 2007. "Compared with February, the profile is higher in the first part of the projection and similar thereafter," the report noted. On the growth side, the picture is "slightly weaker than in February", but output too is still expected "to continue rising steadily at a rate close to its historical average".
• US president George W. Bush opted for a safe pair of hands in the form of Donald Kohn to replace Roger Ferguson as No. 2 at the Fed. The nomination of Kohn, a 36-year Fed veteran, had been widely expected. The experience he brings to the post - having served in senior Fed positions throughout the tenures of Paul Volcker and Alan Greenspan - is of paramount importance at time of change to the top brass at the Fed.
• Stock markets around the world from Bombay to New York to Sydney to Moscow took a beating in mid-May. Although they generally recovered most of their losses, central bankers will be increasingly uncomfortable about the return of market volatility.