MPC Ponders Base Rate As The US Federal Reserve Signals End Of Cuts
The US policy of aggressive interest rate cuts appears to be over after comments from Ben Bernanke. The US has to watch its inflation, just as the MPC does in the UK. The MPC will announce the latest rate on Thursday, and it is highly unlikely to be a downwards move.
The Monetary Policy Committee (MPC) will announce its latest decision on the Bank of England’s base rate on Thursday of this week. As it met to discuss which way it should move, Ben Bernanke, head of the Federal Reserve in the US has hinted that inflation and economic concerns will probably mean that further rate cuts in the States are unlikely.
The Fed has followed a policy of aggressive rate cuts in an attempt to boost the housing market and the economy, and Bernanke is still hopeful that these will stave off a US recession and give the country better economic conditions.
There was a positive result from his comments straight away as light crude oil fell by $3 a barrel to less than $125 – its lowest price for a fortnight. However, some analysts believe that low US interest rates have contributed to the rise in oil prices. Bernanke and the Fed have also had to contend with a weak US dollar, and that has also been contributing to rising inflation. As many goods, such as oil, are priced in US dollars, the weak dollar makes them cheaper for foreign investors, and this increased demand has an inflationary effect.
As the Fed looks ready to stop, and possibly even reverse, its trend of downward interest rates, the MPC in the UK also has to make a decision in the light of the weak housing market, the struggling economy and unexpectedly high inflation. It seems unlikely that there will be enough votes to knock the rate down from its current level of 5%. Although homeowners may feel disappointed if the rate stays where it is, they may comfort themselves that even if the rate went down, the banks – in the current climate –would be unlikely to lower their mortgage rates. However, if the base rate goes up, it is very likely that mortgages will go the same way.
