The effects of the credit crunch are continuing to work themselves out, said Fed Vice-Chairman Donald Kohn on Thursday morning at a monetary policy conference hosted by the European Central Bank. The central banker added that financial markets continue to be under stress from a failing housing sector in the United States and that it is too early to tell whether countries had decoupled from the U.S. Kohn also said the rise in goods and energy prices is confusing given slowing growth worldwide, and argued that some countries should focus on fighting inflation and restraining growth.

Testifying before the UK Parliament on Thursday, Bank of England Governor Mervyn King said he expects inflation to rise further this year and to possibly exceed 4%. He added that recent survey data indicates that UK economic growth will slow and that the economy is likely to weaken in 2008.

Also speaking to Parliament, BOE policy-maker John Gieve said he sees strong upside risks to wage growth, as well as price expectations, and echoed King's forecast of 4% inflation. Gieve also suggested that the current tightness in credit will remain for some time and that excess capacity in firms is expected to keep wage pressures down.

Bank of England's Paul Tucker reiterated that short-term inflation expectations had risen, but added that medium term expectations are still satisfactory. However, he emphasized that there is no room for complacency regarding expectations.

BOE's Kate Barker said a period of excess capacity for firms would help to keep inflation from becoming entrenched and that the interest rate path for 2008 is uncertain.

All members testifying admitted to having contemplated rate hikes at the last meeting.

The Office for National Statistics (ONS) reported that total business investment in the UK fell 1.8% in the first quarter of 2008. Economists had expected a decline of 1.4% following the previous quarter's 1.85% decrease. In annualized term, total business investment increased 4.5%, up from the expected 3.7% rise, but lower than the 5.3% jump recorded in Q4 2007.

The European Central Bank announced that the M3 money supply growth rate remained unchanged at 10.5% in May on an annual basis, up slightly from the 10.4% increase forecast. April's figure was revised down from an initial reading of 10.6%. However, the three-month average growth rate showed some deceleration, falling to 10.4% as expected from April's 10.6% increase, revised down from 10.7%.

According to data from the National Institute for Statistics and Economic Studies (INSEE), French consumer confidence fell to its lowest level in more than 20 years with a reading of -46 in June. Economists had expected sentiment to improve slightly to -41 following May's fall to -42, revised down from -41.

The Federal Statistics Office (Destatis) reported that the German import price index rose 2.4% in May month-over-month, up from both the 1.5% increase expected and the 0.9% growth rate observed in April. May's monthly rise is the largest recorded since September 1990, when the index had increased 2.5%. In annualized terms, import prices jumped 7.9%, the highest increase since November 2000. Economists had forecast a growth rate of 6.9% following April's 5.7% increase.

According to Statistics Belgium, the Belgian consumer price index increased 5.8% year-over-year in June, up from May's 5.21% growth rate. June's annualized rise is the highest recorded since 1984. Month-over-month, the inflation rate slowed to 0.56% in June from a 0.89% growth rate recorded in the previous month.

The Institute for Studies and Economic Analyses (ISAE) reported on Thursday that its Italian business confidence indicator fell to 87.1 in June from the previous month's 89.4 figure, which was revised down from 89.6. Economists had expected a more moderate fall to 88.8. June's reading is the lowest recorded since July 2005.

The National Institute of Statistics (INE) reported that property transfers in Spain fell by a further 7.1% year-over-year in April following March's 38.6% decline. INE also announced that the total number of mortgages in Spain decreased 9.4% in April, up markedly from the 39.7% fall in mortgages recorded in the previous month. The amount of capital loaned for mortgages decreased 13.1% in annual terms following March's 36.9% decline.

Speaking in Paris on Thursday, Bank of France Governor Christian Noyer warned banks to be weary of their exposure to hedge funds as the effects from the U.S. market crisis may not yet be over. Noyer acknowledged that French banks were "financially sound" and had "provided proof of their resilience in the face of the financial turmoil in 2007." However, he added that banks in France need to be vigilant against new risks that may emerge.

Speaking to business executives in Asahikawa, Bank of Japan Monetary Policy Board Member Seiji Nakamura said central bankers have to be flexible in implementing policy given rising uncertainties over the economic outlook, and that a predetermined monetary policy path was inappropriate. The central banker said it was important to monitor consumer inflation expectations and corporate price setting behaviour. He also said the U.S. economic slowdown is intensifying.

The foreign purchase of Japanese stocks rose ¥32.4 billion in the week ending June 20 after rising ¥153.5 billion in the previous week. Buying of bonds declined ¥1312.6 billion following the previous week's ¥726.2 billion buy-up. Meanwhile, the Japanese bought ¥16.3 billion in foreign stocks following the ¥7.3 billion sold in the prior week. The Japanese also sold ¥217.7 billion in foreign bonds following the previous week's ¥164.3 billion sell-off.

The Conference Board reported that Australia's leading economic index for April advanced by 0.3% month-over-month following a 0.4% decline in March.

JP Foreign Buying Japan Stocks W/E 20-June +¥34.2B vs. Revised: +¥153.5B Prior: +¥153.7B

JP Foreign Buying Japan Bonds W/E 20-June -¥1312.6B vs. Revised: +¥726.2B Prior: +¥732.8B

JP Japan Buying Foreign Stocks W/E 20-June +¥16.3B vs. Prior: -¥7.3B

JP Japan Buying Foreign Bonds W/E 20-June -¥217.7B vs. Revised: -¥164.3B Prior: -¥175.9B

AU Conference Board Leading Index April +0.3% vs. Prior: -0.4%

AU Job Vacancies May +3.4% vs. Revised: -2.7% Prior: -2.5%

DE Import Price Index (M/M) May +2.4% vs. Exp: +1.5% Prior: +0.9%

DE Import Price Index (Y/Y) May +7.9% vs. Exp: +6.9% Prior: +5.7%

FR Consumer Confidence Indicator June -46 vs. Exp: -41 Revised: -42 Prior: -41

IT Business Confidence June 87.1 vs. Exp: 88.8 Revised: 89.4 Prior: 89.6

DE CPI-Hesse (M/M) June +0.3% vs. Prior: +0.7%

DE CPI-Hesse (Y/Y) June +3.8% vs. Prior: +3.5%

EU Euro Zone M3 (SA) (Y/Y) May +10.5% vs. Exp: +10.4% Revised: +10.5% Prior: +10.6%

EU Euro Zone M3 (SA) 3 month average May +10.4% vs. Exp: +10.4% Revised: +10.6% Prior: +10.7%

GB Total Business Investment (Q/Q) Q1 Final -1.8% vs. Exp: -1.4% Prior: -1.4%

GB Total Business Investment(Y/Y) Q1 Final +4.5% vs. Exp: +3.7% Prior: +3.7%

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