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Interest rate riddles

Stephen Beard Jul 7, 2011
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Interest rate riddles

Stephen Beard Jul 7, 2011
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JEREMY HOBSON: The European Central Bank has just raised its key interest rate by a 0.25 percent. That follows China’s interest rate hike yesterday. Here in the U.S., meanwhile the Fed is keeping interest rates right where they’ve been since late 2008 — just above 0 percent.

Marketplace’s Stephen Beard explains.


STEPHEN BEARD: Central banks are the original party poopers, as one Fed chairman once famously observed. His job was to take away the punch bowl before the party gets out of hand. Or in other words, push up the cost of borrowing before inflation takes off. But here’s the thing, inflation in the Eurozone is almost 1 percent lower than in the U.S. And yet it’s the European Central Bank, not the Fed pushing up rates today.

That, says Andrew Hilton at the CSFI Think Tank is because the two banks dance to a slightly different tune. The ECB is obliged only to curb inflation, while the Fed must also promote growth and jobs.

ANDREW HILTON: It does give the Fed an excuse. It doesn’t have to raise interest rates as quickly or as high as the ECB which has a very clear single mandate — keep inflation down below 2 percent.

Mind you, he says, today’s rate hike underlines a fundamental problem with the Euro. The hike is aimed at curbing inflation which is a problem in Germany, but won’t promote growth which is urgently needed in Greece, Portugal and Spain.

In London, I’m Stephen Beard for Marketplace.

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