KEY POINTS:
Most of the world's central banks raised their key interest rates in a series of measured steps last year, reflecting the steady growth and low inflation in countries around the globe and the absence of booms and busts.
Based on current forecasts, there might be fewer changes in key central bank interest rates in 2007. To the extent policy makers raise rates, they will almost certainly continue to be in quarter-percentage-point increments, as were virtually all of last year's changes by banks in industrialised nations.
The Federal Reserve paused after increasing its target for the US overnight lending rate in four steps to 5.25 per cent in June.
With US core inflation (which excludes food and fuel) still above 2 per cent and unemployment at 4.5 per cent, Fed officials might raise the target again if inflation or economic growth accelerates, though neither is forecast to happen.
Should the slowdown in housing begin to damp consumer spending and cause inflation to ease, the target may be cut - and many analysts expect it will sometime in 2007.
The European Central Bank raised its key rate five times to 3.50 per cent as growth in the 12-nation euro area (soon to become 13 with the addition of Slovenia next month) gathered steam, particularly in Germany.
The latest move was on December 7 when ECB president Jean-Claude Trichet said there are still "upside risks to price stability over the medium term," signalling more rate increases might come in the first half of 2007. In contrast, the Bank of Japan lifted rates only from zero to 25 basis points as that nation still struggled with the aftermath of more than a decade of deflation.
Unlike most central banks, the Bank of Japan shifted its focus from consumer-price inflation to the need for "normalising" the level of interest rates. That is, raising them to a 2.5 per cent to 3 per cent level so that the bank would have the leeway to cut borrowing costs if the economy were threatened by a future crisis.
The intent is for that to happen very gradually with overnight rates rising only 50 or 75 basis points annually for several years. Of course, that assumes the Japanese economy will continue to grow enough to absorb the rate increases, something that is far from certain.
The Bank of Japan didn't raise rates at a policy-making meeting last month, after which Governor Toshihiko Fukui told reporters: "It's true that CPI and consumption-related data have been somewhat weak. We'll need to take extra care in examining data and a range of information that becomes available."
Nevertheless, many analysts in Tokyo are looking for a quarter-point rate increase next month.
Elsewhere, Sweden's Riksbank lifted its target rate by 150 basis points to only 3 per cent. Next door, Norway's Norges Bank raised its benchmark by 125 basis points to 3.5 per cent.
The Central Bank of Iceland had an unusually rough year last year.
Because of rapid economic growth, large inflows of foreign capital and wide swings in the value of its currency, the bank was forced to raise its policy rate seven times, to 14.25 per cent, up 375 basis points for the year.With an unemployment rate of 1.1 per cent and inflation of 7 per cent - far above the bank's 2.5 per cent target - rates increases are possible.
The lowest key rate in Europe, as usual, is at the Swiss National Bank, at 2 per cent, up from 1 per cent a year ago.
Indeed, Swiss economic growth was close to 3 per cent last year, the inflation rate slightly more than 1 per cent - and expected to fall in 2007 - and unemployment should drop to less than 3 per cent soon, Roth predicted.
Meanwhile, the Bank of Canada matched the Fed's cumulative 100-basis-point increase in the first part of last year, though that still left its key rate a full percentage point below the Fed's. The bank expects total and core inflation to converge at about 2 per cent in the first half of this year. Economic growth might accelerate given momentum in household spending and housing prices. It also could slow if the US economy slumps and hurts Canadian exports, the bank said.
Officials at the Reserve Bank of Australia are concerned that underlying inflation, which has increased from about 2.5 per cent rate at the end of last year to about 3 per cent currently, might accelerate further. The bank's key rate was raised by only 75 basis points last year, though it is at a relatively high 6.25 per cent.
The Reserve Bank of New Zealand, which is also worried about "medium-term inflation pressures," didn't raise rates at all last year after boosting them to 7.25 per cent in late 2005.
- BLOOMBERG
