As we read comments recently from European Central Bank (ECB) President, Reserve Bank of Australia (RBA), and Federal Reserve Board (Fed) Chairman, one can’t help but notice that fear of inflation is now as important as fear of slow economic growth for these major economies.
Their comments focused on fear of inflation caused by rising oil, food and other commodities prices. These central banks are not about to cut interest rates to help lift economic growth for their economies. RBA kept their interest rate on hold at 7.25%. ECB will possibly keep their interest rate at current rate. Fed will probably hold on to 2% interest rate which was low since cutting 3.25% so far to prevent a major slowdown resulting from the financial credit crisis.
To reduce interest rate meant that more money supply will come on to economy, resulting in increasing demand for goods and services and hence raising the inflation rate further.
In order to dampen inflation, it is more likely that interest rate will go up. As a result, the currency rate will rise vis-à-vis other currencies. US dollar has risen recently on expectation that cut of interest rate will be halted for a while until the economy outlook is clearer. With appreciation of US dollar, imported inflation will be moderated and this serves the cause of fighting inflation in US.
Stock market is in a state of flux, since raising interest rate meant that share prices will drop. But with lower inflation at home, consumption expenditure can be stimulated, hence improving the economy and resulting in stock market moving up.
Written on 6/6/2008 3:39 PM
Copyright © 2008, the author known as LKT in Singapore.
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