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FOREX: Bernanke, Fukui, Trichet May Fail King's `Boring' Test on Rates Bank of England Governor Mervyn King says interest rates should be so predictable that investors view policy-making as ``boring.'' On the evidence of economists' forecasts for 2007, the world's central bankers may fail his test.   FOREX: Bernanke, Fukui, Trichet May Fail King's `Boring' Test on Rates By Simon Kennedy and Matthew Benjamin Dec. 26 (Bloomberg) -- Bank of England Governor Mervyn King says interest rates should be so predictable that investors view policy-making as ``boring.'' On the evidence of economists' forecasts for 2007, the world's central bankers may fail his test. A year ago, economists were almost unanimous in predicting U.S., Japanese and European rates would go up in 2006 -- and they were right. This time, some of them will be seriously wrong, reflecting the likelihood of a far more volatile global economy where the risks of inflation on the one hand and slowing growth on the other are more evenly balanced. ``Maybe things aren't going to be so boring after all, and there are reasons why you should worry that they could be dicier,'' John Lipsky, first deputy managing director of the International Monetary Fund, said in a Dec. 21 interview. Goldman Sachs Group Inc. expects Federal Reserve Chairman Ben S. Bernanke and his colleagues to cut the Fed's benchmark rate to 4.5 percent; Barclays Plc foresees a rise to 6 percent. ABN Amro Holding NV says European Central Bank President Jean- Claude Trichet and ECB policy makers will lift their main rate twice, to 4 percent, while Deutsche Bank AG says the ECB will cut by year's end. Estimates for the Bank of Japan and King's own Bank of England are similarly split. ``We've not seen this kind of divergence for quite some time,'' says Avinash Persaud, chairman of London-based financial consultant Intelligence Capital Ltd. Volatility This year's predictability helped keep stock-market volatility close to the lowest level in a decade, as measured by the Chicago Board Options Exchange's SPX Volatility Index. That's about to change, according to a Merrill Lynch & Co. survey of 210 fund managers: The survey indicated 77 percent expect higher stock-market volatility next year. For economists, the debate comes down to how severe the U.S. slowdown will be and how well the rest of the globe copes with it. The world's biggest economy slowed to an annual growth rate of 2 percent in the third quarter from 5.6 percent six months earlier, as a housing recession and an auto-industry slump sapped demand. Goldman, which expects the Fed to cut rates in the second quarter, sees ``increasing evidence that the inflation scare of 2006 is over'' and expects growth to ``remain below trend.'' Dean Maki, chief U.S. economist at Barclays Capital in New York, takes a contrary view, predicting the fallout in the housing market will soon pass and inflation will remain above Bernanke's comfort zone of 1 to 2 percent. Turning to Inflation ``Once it becomes clear that the worst of the housing-market contraction is behind us and the economy is on a solid footing, we expect the Fed to turn its attention to inflation,'' says Maki. U.S. economic growth will slow to 2.5 percent in 2007 and the Fed will cut its benchmark rate a half-point to 4.75 percent, according to the median forecasts in a Bloomberg News survey of 79 economists. The range of individual forecasts, though, is much wider than it was a year ago. Predictions of the Fed's benchmark rate six months from now range from 3 percent to 5.75 percent; a year ago the high and low forecasts for June 30, 2006, were separated by just a percentage point. Similarly, forecasts of second-quarter economic growth range from a contraction of 1.4 percent to expansion of 4.3 percent; a year earlier, growth forecasts for the second quarter of 2006 were all between 2 percent and 4.5 percent. `Extreme Forecasts' ``I've never seen such extreme forecasts,'' says Michael Dicks, chief European economist at Lehman Brothers Holdings Inc. in London, who has two decades of forecasting experience. When it comes to the rest of the world, the forecasting gets even trickier, reflecting a split in views about how the U.S. slowdown, however severe it turns out to be, will affect economies elsewhere. Thomas Mayer, chief European economist at Deutsche Bank in London, says the U.S. will drag down growth in the dozen euro nations, which just recorded their strongest economic performance in six years. European growth is also threatened by a rising euro and higher taxes in Germany and Italy. ``Europe faces a lot of headwinds,'' says Mayer, who forecasts the ECB will cut its benchmark rate twice after raising it another quarter-point. Others, including the European Commission, say Europe won't be hurt much by the U.S. slowdown. Europe, the commission says, is less reliant on trade with the U.S., and domestic growth is stronger than during previous American slumps. European Demand Dario Perkins, an economist at ABN Amro in London, says demand in Europe is picking up, with unemployment at a five-year low and money supply growing more than 8 percent a year. That will keep inflation above the ECB's target of just below 2 percent for an eighth year, he says. ``The economy still has lots of momentum, so the ECB will retain a tightening bias,'' says Perkins, who predicts the ECB will increase its key rate to 4 percent by the middle of the year. Perkins says the Bank of England will also raise rates above the current 5 percent after the U.K. inflation rate reached its highest in at least nine years in November. Deutsche Bank's Mayer isn't as sure that ``the U.K. can disassociate itself from the U.S.'' and last week predicted the Bank of England will cut rates by a quarter-point next year, revising his previous forecast of no change in rates. Outlook for Japan Economists are no closer to consensus on the outlook for the Bank of Japan, which increased its overnight rate in July for the first time since 2000. Japan's 0.25 percent rate is the lowest among major economies. Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. in Tokyo, predicts the overnight rate will reach 1 percent next year. ``Companies' confidence is improving and the labor market is tightening,'' says Kanno, a former Bank of Japan official. Yasunari Ueno, chief market economist at Mizuho Securities Japan Co. in Tokyo, says Bank of Japan Governor Toshihiko Fukui won't be so bold. Ueno says Japanese consumer spending remained weak in the third quarter and the pace of economic growth was less than half the government's 2 percent forecast ``The Bank of Japan needs to check much more economic data before raising rates,'' says Ueno, who predicts a quarter-point increase in October at the earliest. Worldwide, ``no one's quite certain,'' says Rick Lacaille, U.K. chief investment officer at State Street Global Advisors, which manages more than $1.5 trillion. ``Everything's in place for an increase in volatility.''

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