No rush to cut

23 January 2008 By Edward Hadas

The ECB and the Bank of England may share the US central bank s growing worries about slower growth and financial distress. But they are more worried about inflation, and at least the ECB can survey a healthier economy. With the Fed hyperactive, they can afford to be cautious.

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The Federal Open Market Committee lowered its target for the federal funds rate by 0.75% to 3.5% on January 22. It also lowered the discount rate by 0.75% to 4%.

Fed fund futures are pricing in a 100% chance that another cut will be made when the FOMC has it regular meeting on January 30, with the highest probability action being a 0.5% rate cut. A week ago, traders saw no chance the Fed would cut below 3.5% this month.

In a prepared speech to business leaders, Mervyn King, governor of the Bank of England, said that the British economy could slow quite sharply and the central bank's 5.5% interest rate may be restricting economic growth. He added: It is possible that inflation could rise to the level [3%] at which I would need to write an open letter of explanation, possibly more than one, to the Chancellor.

UK consumer price inflation was 2.1% in January 2008, slightly above the Bank of England's 2% target rate.

Euroregion headline inflation of the harmonised index of consumer prices was 3.1% in December 2007, the fastest in six years and well above the ECB's 2% limit.

US consumer prices rose by 4.1% in 2007.

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Should the ECB follow the fed and cut interest rates? To vote, click here.

Context News

The Federal Open Market Committee lowered its target for the federal funds rate by 0.75% to 3.5% on January 22. It also lowered the discount rate by 0.75% to 4%.

UK consumer price inflation was 2.1% in January 2008, slightly above the Bank of England's 2% target rate.

Euroregion headline inflation of the harmonised index of consumer prices was 3.1% in December 2007, the fastest in six years and well above the ECB's 2% limit.

US consumer prices rose by 4.1% in 2007.

Breakingpoll
Should the ECB follow the fed and cut interest rates? To vote, click here.

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