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21 February 2008 - Fed Rates Could Increase Before Long

Federal Reserve officials signalled they are prepared to quickly reverse last month's interest-rate cuts despite concluding that borrowing costs need to be kept low, for now anyway. Policy makers cut their 2008 growth forecasts and said that rates should be held down "for a time", minutes of their Jan 29-30 meeting showed last evening. They also called inflation "disappointing" and some foresaw raising rates, possibly at a "rapid" pace once the economy recovers. The threat goes beyond remarks by Mr Bernanke, who last week warned that policy will have to be "calibrated" over the next year to meet both inflation and growth objectives. Central bankers seem to be very wary of past criticism for keeping rates too low, too long and inflating asset bubbles.

The decision by the Bank of England to cut interest rates by 25 bp to 5.25% on the 7th February was approved by 8 votes to one, with David Blanchflower again being the man to make a point and voting for a 50 basis points rate cut. The Bank sees financial markets still in a stressed scenario, with pressure on bank's balance sheets intensifying.

Jean-Claude Trichet is not about to cut interest rates, according to many speculators around the markets whom in fact managed to defy conventional wisdom in previous times to correctly predict the European Central Bank president's course two years ago. It is in actual fact expected now, that Trichet will not lower borrowing costs this year, whereas conflicting views in recent times have been that the ECB will reduce its key rate from 4 percent.

The Australian and New Zealand dollars rose as a gain in commodity prices and a rally in US stocks gave investors confidence to buy higher-yielding assets with funds from Japan. The two currencies climbed led by the increases in the prices of gold, Australia's third most valuable export.

World oil prices were near 100 US dollars again this morning after again hitting all time highs yesterday. Crude oil hit the all-time peak of 101.32 dollars yesterday, with it expected that prices could go even higher in the short term with any OPEC decisions on whether to increase output levels on March 5th.

Sources: Currency UK Ltd, AIB, Bank of England. Page last updated: 21 February 2008 10:13

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