Across continental Europe, policy interest rates are headed upward, and maybe a little faster than the markets currently expect. Today's 25bp rate hikes from the Norwegian and the Swiss central banks were widely anticipated, not because of current levels of inflation but because of expectations that stronger domestic economies will boost price pressures further down the road. As in the Euro-zone and in Sweden, the central banks are taking steps to return to "normal" interest rate levels before things get out of hand.

Norges Bank took its deposit rate up to 2.50% and reaffirmed plans for further rises in "small, but not too frequent steps towards a more normal level." High oil prices have boosted the economy of the world's third-largest oil exporter, with non-oil GDP up 1.1% on the quarter in Q4, bringing 2005 real GDP growth to 3.7% (3.8% in 2004). The central bank's core inflation measure rose just 1.0% on the year in February, well below the policy target of 2.5%, but Norges Bank looks to inflation one-to-three years out in setting rates, and sees enough momentum in the economy to start putting on the brakes now. The bank has pointed in particular to the booming housing market, rapid rise in household credit, and strong labor market.

The Swiss National Bank (SNB) also has its eye on the future. The SNB started its tightening mode with a 25bp hike back in December. Today, it raised its target range for three-month Libor by another 25bp, to 0.75-1.75%, with the focus remaining on the middle of the target range (i.e., effectively hiking the policy rate from 1.00% to 1.25%). The bank noted that the economic recovery that began last year is "gaining further momentum and becoming increasingly broad based," that monetary policy "remains expansionary and supportive" and that it anticipates a "further gradual adjustment of monetary policy" in response. Headline CPI came in at 1.3% in February, below the bank's price stability target of 2.0%, but the economy overall is clearly in an upswing. In fact, February's KOF leading indicator climbed to its highest level in almost six years. It is safe to assume that another 25bp hike is in the offing at the SNB's next quarterly policy meeting in June.

There's a similar story in Sweden. The Riksbank has hiked its key repo rate twice already this year, and earlier today Deputy Riksbank Governor Rosenberg described monetary policy as still very loose. As with its neighbors, the Swedish central bank is not concerned about current rates of inflation, but about the outlook. The Riksbank targets underlying inflation (UND1X, ex-indirect taxes and interest rates) of 2.0% over a two-year forecast horizon. UND1X rose just 0.8% on the year in February, but the central bank's current outlook is that inflation starts to rise toward the end of its forecast period. With household consumption and corporate investment both continuing to rise, and signs that capacity utilization and cost pressures are increasing, the bank remains in tightening mode. Market expectations are for a 25bp rate hike in June. However, February's unemployment rate came in better than expected today - dropping to 5.6% from 6.3% in January - and the government yesterday raised its 2006 GDP growth forecast from 3.1% to 3.6%. The Riksbank could well decide to act earlier than the markets expect, perhaps at the next meeting on April 27-28.

Which brings us to the ECB. Euro-zone inflation eased a tad in February, to 2.3%, as the effect of high oil pr ices dissipated a little. But once again, it's the outlook that is the concern. Since the 25bp rate hike on March 2, we've seen a steady drum beat of statements from Governing Council members that, in addition to high oil prices, money and credit growth pose a risk to price stability.

On Tuesday, Governor Trichet made his usual references to "abundant liquidity" and the bank's "accommodating" monetary policy. The markets have been assuming that the next upward move will come on June 8, but there is a possibility of a move on May 4. If Trichet starts using the word "vigilant" in his speeches next month, then the possibility will become a probability.

It has been argued that ultra-low global interest rates engineered by central banks have encouraged various "carry" trades, which have reduced risk premiums in many asset categories. To the degree that the preponderance of central banks are in the process of "normalizing" their policy interest rates, some unwinding of these carry trades could be expected with risk premia beginning to widen out commensurately.