European Market Update - BOE Indicates that Rate Hikes May Not Have Come to an End

The European indices are currently trading higher led by the mining sector as wells as gains in shares of DaimlerChrysler amid continuing speculation around the company’s restructuring plans.
European government bonds are trading lower in the session on little news as there were no scheduled economic numbers, new supply or central bank speakers ahead of the holiday in the US. Similarly in the UK gilts opened lower, and continued to decline after comments from the Bank of England. Gilts pushed lower after the BOE noted that the low level of real rates appears to be unsustainable.
Late Sunday night Rightmove house prices were released for the month of February. M/M house prices were 0.9% above the 0.5% in January, while the Y/Y figure was 11.5% below January's 13.5%. Rightmove said that house prices rose in February compared to January as a shortage of real estate for sales weakened the impact of higher borrowing costs. Later on, during the European session, Rightmove’s Shipside said that markets are very sensitive now, noting that more people may be ruled out of the housing market. Shipside continued saying that If the BOE does not raise rates again growth of 4%-5% could be sustained.
The Japanese Government released its monthly assessment of the economy during the European session, leaving its assessment unchanged from January. The assessment noted that the economy is recovering despite weak consumption, additionally pointing out that consumer prices are almost flat.
Throughout the European session a series of Japanese officials reiterated much of the same rhetoric seen ahead of last month’s interest rate decision. Ahead of tomorrow’s decision the Prime Minister, Economic Minister, and Finance Minister all reiterated the view that the Bank of Japan and the Japanese government share the same view on the economy as well as the same goals. Further more each official reiterated that the BOJ’s decision will be made on its own accord. A recent survey of 50 economists showed that 24 of the survey economist anticipate that the BOJ will raise interest rates by 25bps to 0.50% at Tuesday’s meeting.
In a submission to the UK Treasury Committee the Bank of England made some comments. Most notably the BOE said that the low level of real rates looks unsustainable, pointing out that it is unwise to ignore money supply entirely, furthermore pointing out that the accumulation of household debt may complicate future monetary policy. The BOE also said that CPI has been low and unusually stable in the UK since the BOE began targeting inflation. The BOE said that some depreciation of the real exchange rate may be necessary in order to close the current account deficit. Finally the BOE said that policymakers may raise rates and undershoot the CPI target in the near-term as an attempt to mitigate the current situation.
The German Bundesbank released its monthly economic report for the month of February overnight. The report pointed out strong Euro-Zone money supply growth as a long-term inflation risk, noting that cheaper oil prices has helped to ease the short-term inflation outlook. The report also said that downside risks to the global economy have eased with the past year. Regarding the German economy the report pointed out that the outlook for the economy remains positive, but noted that the VAT hike has not yet been fully reflected.
Front month crude oil futures are currently trading lower in the session, but are on the rise on speculation that broader Nigerian attacks on oil facilities may begin to occur in the near future after three Croatian oil workers were kidnapped in Nigeria overnight. Note also that, overnight, Goldman Sachs extended its forecasts for the European oil sector until 2012, adding 3% to their current price targets. Goldman cited BG, Total, and Royal Dutch Shell as the three main beneficiaries, boosting price targets for the companies by 5%, 5%, and 4% respectively.