Bank of England, European Central Bank Remain Tough On Inflation
Thursday, May 08, 2008; Posted: 03:15 PM
(RTTNews) - Inflation threats are being taken seriously by the European Central Bank and Bank of England, both of who voted to leave their interest rates unchanged Thursday despite a slowing economy. Their staunch stance comes in contrast to a series of rate cuts from the Federal Reserve, which has shaved 325 basis points off the federal funds rate, bringing it to its lowest level since 2004. However, on the other side of the pond
For evidence that inflation is a problem, look no further than the rising commodity and energ
y prices, International Monetary Fund Official John Lipsky said Thursday. He added that global inflation is threatening to upset years of price stability, even against the backdrop of a slowing global economy. He urged central banks around the world to act to curb inflation before the problem gets out of hand.
"Signs of more general inflation pressures would justify a decisive policy response, lest the impressive gains in global stability attained in recent years be sacrificed," he told the Council on Foreign Relations in New York.
Lipsky warned that 1970s style stagflation "cannot be discarded out of hand," although he added that the IMF remains optimistic that the combination of rising inflation and a slowing economy will not come to pass.
The ECB and BOE are standing tough on inflation. The ECB announced Thursday that it is holding its interest rates at a six-year high, refusing to cut rates in an effort to counteract a slowing economy.
The ECB’s governing council left its minimum bid rate on the main refinancing operations, which is its benchmark lending rate, unchanged at 4%. The decision was in line with expectations.
The central bank also held the interest rates on the marginal lending facility at 5% and those on the deposit facility at 3%. The latest rate setting session was held in Athens, as the governing council meets twice a year outside Frankfurt.
ECB President Jean-Claude Trichet ramped up his hawkish tone in comments accompanying the central bank’s decision to leave its key lending rate unchanged. Rate cut expectations were dampened, with Trichet warning that higher wages might add to inflationary pressures.
"The risks to the outlook for inflation over the medium term remain clearly on the upside", Trichet said. "These risks include the possibility of further rises in energy and food prices, as well as of increases in administered prices and indirect taxes beyond those foreseen thus far. Most importantly, there is a risk that price and wage-setting behavior could add to inflationary pressures."
Addressing inflation, Trichet noted that annual HICP inflation has remained above 3% for the past six months. According to Eurostat’s flash estimate, it was 3.3% in April 2008.
"This outturn confirms the ongoing strong short-term upward pressure on inflation, resulting largely from sharp increases in energy and food prices at the global level in recent months," Trichet said.
Thursday, the UK central bank left the key interest rate unchanged as policy makers worried more about higher inflation than slowing growth.
The Bank of England’s Monetary Policy Committee voted to maintain the official Bank Rate paid on commercial bank reserves at 5.0%. The decision was widely expected.
Unlike the ECB, the Bank of England cut rates three times in recent months. In April, the Bank of England lowered the interest rate by 25 basis points to 5%. It was the third interest rate cut since December 2007. The minutes of the meeting showed that the MPC split three ways for the first time in nearly two years to decide on the rate cut.
In England, the central bank is struggling with the possibility of soaring food and energy prices pushing inflation higher. The annual inflation rate continues to hold well above the central bank’s target of 2%. In March, the UK annual inflation was at 2.5% and the rate is widely expected to move above 3% in the coming months, triggering an open letter from the central bank chief to the Chancellor.
In contrast, the U.S. Federal Reserve has cut interest rates at 7 consecutive meetings, dropping the federal funds rate 3.25 percentage points from last September to its current level of 2 percent. Inflation is a concern, as evidenced by dissenting votes from two Federal Reserve officials against the last pair of rate cuts.
While their fellow central banks across the pond focus on inflation, the U.S. is facing a tougher economic slowdown than either the European Union or England. As the IMF’s Lipsky noted, the most severe slowdown has taken place in the United States as a result of the credit, housing, and subprime mortgage crises.
"The effects of the slowdown are being felt most keenly in the United States, but growth in all regions of the world is slowing," Lipsky told the audience.
In their latest statement, the Fed suggested that the latest rate cut would be the last in the series, as inflation pressures pick up.
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