Is there a march to raise interest rates in the face of the disaster in Japan? Some investors are starting to doubt it, but the threat of inflation means most rate hikes are likely to go ahead.
Before the earthquake, central banks around the world were gearing up to tighten policy. Now markets are scaling back their pricing of future rate rises, as it becomes clear the damage to Japan's economy could be worse than originally thought.
But unless there is a widespread, long-term crisis over Japan's nuclear power plants, the economic impact on the rest of the world still does not seem as if it will be nearly large enough to alter central banks' intentions.
"The good news/bad news is that Japan has not been an engine of global or Asian growth for some time," said IHS Global Insight chief economist Nariman Behravesh.
"This means that the impact of much lower Japanese growth on the world economy will probably be limited and small."
Norway's central bank signaled on Wednesday it would raise interest rates slightly sooner than originally expected because inflation was picking up. It kept its key interest rate flat but issued a forecast implying a hike by June.
Its policy statement made a brief reference to Japan, saying the effect on global growth was "uncertain," but focused mainly on issues such as global commodity prices and government spending curbs elsewhere in Europe.
In Europe, Euribor futures contracts for April show the market expects the euro zone's benchmark interbank rate to be trading at 1.285 percent in a month's time, about 5 basis points lower than pricing before the earthquake.
Since Euribor historically trades around 10-15 bps above the European Central Bank's refinancing rate, now at 1.00 percent, the market is no longer fully pricing in a 25 bp hike at the ECB's April policy meeting.
There have been a few signs that European economic confidence may be hit by Japan; on Tuesday, the ZEW think tank said its index of German analyst and investor sentiment unexpectedly fell in March, partly due to Japan.
Asked by the German daily Handelsblatt whether the Japanese disaster could influence ECB policy, ECB Governing Council member Christian Noyer said: "We will as usual take account of all new information and that will be part of our global assessment."
However, the latest private estimates of damage to the global economy remain small; IHS Global said it would be negligible this year, at most in the 0.1 to 0.2 percent range, with a corresponding boost next year.
Although oil and commodity prices have fallen back since the earthquake, they are still well above levels a year earlier, and could well rebound later this year as demand for reconstruction in Japan kicks in.
And analysts said most of the drop in the ZEW index was due not to Japan but to expectations for a euro zone interest rate rise, after ECB President Jean-Claude Trichet called early this month for "strong vigilance" against inflation, a signal that a hike could well come in April.
Because Trichet put some of the ECB's inflation-fighting credibility on the line with that statement, it would take a drastic deterioration in the outlook for the global economy or financial markets for the central bank to change course now, many analysts said.
"Maybe the ECB was a bit too fast in preannouncing the interest rate hike, which painted them into the corner," ING economist Carsten Brzeski said. "It needs a lot for them to postpone a rate hike."
Brzeski said he now saw a 75 percent chance of an April rate increase, against 95 percent in early March.
In Britain, investors have in the last few days dramatically pushed back the earliest date on which they expect the Bank of England to raise interest rates. Money markets are now not pricing in a hike until August, having factored in a 25 bp hike in May only a few weeks ago, and June as recently as last week.
But economists said that while the bulk of the repricing was due to the Japanese disaster and worries about political turmoil in the Middle East, softer British economic data was already causing investors to become less certain about a hike.
"The bottom line is that markets tend to overreact," said Richard Barwell, economist at RBS. "Central banks have to have a slightly more objective perspective about what's going on."
He added that "at the margin [Japan] may have an effect, but the most likely outcome is that it probably won't have a significant impact" on British interest rates.
In Switzerland, the uncertainty over Japan has removed the outside chance of a surprise rate hike by the Swiss National Bank (SNB) at its decision on Thursday, economists said.
Interest rate futures had been pricing in an SNB hike in September, with some chance of a move in June, but Japan has sent the franc up sharply against both the euro and the dollar. Since Switzerland does not want too strong a franc, bets on a rate hike have pulled back to December 2011.
Before the Japanese disaster, analysts had expected the SNB on Thursday to clearly set the stage for rate hikes later this year. Now, it is likely to sound more cautious.
"The uncertainty has risen of course and the reaction of the Swiss franc is clear. Given this background, the SNB will likely be careful not to issue a hawkish statement," said Credit Suisse economist Fabian Heller.
In many Asian countries, inflation pressures are strong enough for central banks to stick to their tightening schedules.
"Japan's disaster, though incomparably tragic, is unlikely to knock emerging Asia off its current growth trajectory or provide the necessary deflationary impulse to ease rapidly growing price pressures," HSBC said in a report.
India's central bank is widely expected to raise key rates by 25 bps on Thursday. "I think it's too early to assess the full impact," said Samiran Chakraborty, head of India research at Standard Chartered Bank in Mumbai.
Simon Wong, regional economist at Standard Chartered Bank in Hong Kong, said he still expected the Philippines' overnight borrowing rate to be raised by 25 bps from a record low of 4 percent next week.
He said there was now a risk of the Philippine central bank staying on hold, but "I still think the central bank should use this opportunity to start raising interest rates, otherwise it's going to be perceived as lagging ... Japan's current situation may argue for higher inflation, not lower inflation."
Markets have long expected the U.S. Federal Reserve to be one of the last central banks to tighten policy; it is still conducting a radical easing strategy based on bond purchases.
But there is no evidence that Japan's disaster will cause the Fed to delay further. The Fed made no mention of Japan or even an oblique reference to global uncertainties in a statement after its policy meeting on Tuesday.
"Events in Japan and geopolitical issues really didn't weigh in terms of how they are seeing the evolution of risks in their overall outlook," said Eric Green, chief economist and head of rates strategy at TD Securities in New York.
"There isn't anything in here to suggest that the Fed is treating events in Japan as a threat to the overall outlook. If anything they are looking through this at this point and saying we are very much on track for where we would want to be."
In Canada, Japan's impact on commodity prices could play a role in how soon the Bank of Canada resumes the interest rate hike campaign that it halted last year. Traders on Tuesday began reducing bets on Canadian rate hikes in coming months as commodity prices fell, but unwound those trades when resource prices rebounded.
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