Saturday, October 6, 2007

Bank of UK to lower rates

The Central Bank of the UK will likely lower interest rates at its next meeting, following the lead of the Fed. The most recent British economic data indicated that inflation has fallen to its lowest level in over a year. Moreover, UK (and European for that matter) monetary policy prioritizes price stability over employment, by unofficially targeting an inflation benchmark. Thus, without regard to economic growth, the Bank of UK will adjust interest rates accordingly. While the Pound-Dollar exchange rate is less sensitive to relative interest rates, the Pound has already fallen against the Euro, since the two countries compete over foreign capital. Bloomberg News reports:

"The move down is probably going to continue. Sterling will remain under pressure. If any major central bank is going to emulate the Fed and cut rates, it's going to be the BOE.
Fed Chiefs Act Alike in Crisis

Alan Greenspan, former President of America's Federal Reserve Bank, gained notoriety as well as universal trust based on his perceived ability to conduct monetary policy in exactly the way that the US economy demanded. It was initially thought that his successor, Ben Bernanke, who has been in office for over a year, would have a more difficult time facilitating economic growth and avoiding recession because his primary goal was to control inflation. In practice, however, the two leaders have conducted monetary policy in much the same way, balancing the dual risks of inflation and unemployment. Thus, even though inflation remains above the Fed's comfort zone, Bernanke engineered a 50 basis point rate cut at the last meeting of the Fed in order to avoid economic recession. However, whether the Fed will prioritize unemployment (rate cuts) or inflation (rate hikes) is anyone's guess. Dollar bulls will no doubt be watching with bated breath, praying that he prioritizes inflation. The New York Times reports:

“Where Greenspan had to hold off raising rates when the economy was strong. Bernanke's challenge will be to hold off cutting rates when the economy slows down.”

1 comment:

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