Interest rates: Bank of England expected to follow US Federal Reserve

The Bank of England is expected to follow the US Federal Reserve when it issues new guidance on setting interest rates on Wednesday.

The Federal Reserve has tied the possibility of higher interest rates to a fall in unemployment to 6.5%, while maintaining the fight to keep inflation below 2.5%.

On current projections, the unemployment rate could hit 6.5% by the summer of 2015, though it takes only a small rise in GDP growth to bring this forward a year. The unemployment rate stands at 7.4%.

Critics of Federal Reserve boss Ben Bernanke argue that he is ignoring the possibility of a significant rise in economic output that is likely to result in inflation. However, the inflation rate has remained below the Fed's 2% target, giving Bernanke plenty of room to keep rates at 0.25%.

There are several key differences between the Bank of England stance and the policies pursed by the Fed. The Fed has supported the complete refinancing of US banks, which has put them in a position to lend money provided by the Fed, unlike British banks which have hoarded Bank of England cash.

The Fed has used its cash to buy poorly performing mortgages, which has helped lenders offload assets that would otherwise have restricted them from lending. This support has been coupled with a harsh stance on repossessions, which rocketed after the crash and forced banks to take losses, especially on over-inflated sub-prime mortgages.

These more activist policies of the Fed contrast with the Bank, which critics say has pumped cash into monopolistic high street banks and hoped for the best. Schemes such as funding for lending have tried to circumvent the banks, but have so far fuelled a boom in mortgage loans rather than a surge in lending to businesses.

Powered by article was written by Phillip Inman, for The Guardian on Monday 5th August 2013 23.38 Europe/London © Guardian News and Media Limited 2010


image: © Bloomberg

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