Inflationary pressures are continuing to command attention from the central banks and analysts alike.

Against this backdrop, the differing stances of the central banks have been assessed, with the European Central Bank (ECB) president, Jean-Claude Trichet, attracting praise for maintaining a steady hand on interest rates within the euro-zone to keep inflation under control. There is even talk of a rate rise in July to bring inflation down towards the Bank’s target of 2%.

While inflation in the euro-zone is sitting at a 16-year high of 3.6%, influenced mainly by high levels in Germany, it is reported that the majority of the ECB board members view this as a short-term situation and that they have publicly ruled out the possibility of successive future rate rises.

The International Monetary Fund (IMF) has recently upgraded its growth forecast for the euro-zone and is predicting that growth across the 15 nations will average 1.75% over 2008. This compares favourably with its forecast of 1.4% made two months ago. The IMF has, however, maintained its prediction of growth of 1.2% for 2009 - a stark contrast to the 2.6% enjoyed in 2007.

In the US, the aggressive rate cutting strategy of the Federal Reserve, with the benchmark rate having been reduced to 2%, has prompted questions about the existence of a clear strategy to tackle inflation.

Meanwhile, in the UK, while rate cuts have been more modest than in the US, there have been reports that the Bank of England Governor, Mervyn King, may have to write another letter to the Chancellor of the Exchequer to explain why the UK has breached its 3% inflation limit.

Looking at currencies, the pound has advanced against most major currencies after an unexpected surge in UK retail sales, which increased 3.5% in May after falling 0.3% in April, according to data from the UK Office for National Statistics. A Bloomberg survey showed that economists had forecast a fall of 0.1% for the May figure.

Sterling’s strength has also been reflected in the dollar’s position against the euro as traders have sold euros and bought the pound. The US currency has risen 0.4% to USD1.5480 per euro.

Turning to oil, there has been comment that economic growth in the US next year could be reduced as much as 25 basis points if the price of oil does not fall.

The price of a barrel of crude has fallen by more than USD4 from the USD139.89 reached at the start of the week. It is currently sitting at USD135.44. The stronger dollar has dampened the appeal of commodities as an inflation hedge, which has helped to negate the effect of an oil field closure in Nigeria due to rebel attacks on pipelines and platforms.

As the financial markets continue to react to the short-term influences of the latest data releases, make sure you speak to your Account Executive to find out how you can access Hansard’s extensive range of fund links when creating and reviewing client portfolios.

David Findlay

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