No rush to cut

23 January 2008 By Edward Hadas Follow @edwardhadas

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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