By: Dr. Mike Campbell
Amidst the turmoil of the sovereign debt crisis and the consequent uncertainty on European and global stock exchanges, it was quite unsurprising that both the European Central Bank (ECB) and the Bank of England have left interest rates at their historically low levels. The rates are designed to permit businesses to borrow money cheaply, so as to stimulate the economic recovery and, to a much lesser extent, encourage consumer spending since money on deposit earns very little interest.
The ECB has maintained interest rates at 1% for the tenth consecutive month. ECB president Jean-Claude Trichet commented that EU growth was “moderate and uneven” and commended EU finance ministers for their resolve to tackle the debt crisis that has seen deficits throughout the EU rise significantly. Plans are in hand in the majority of EU states to reduce deficits through tax increases and public spending cuts this year or in 2011. This communal belt tightening may slow economic growth and will keep inflation under control, so the ECB will be able to continue with its low interest policy for some time to come. Inflationary pressure is often reduced by increasing interest rates to make borrowing more expensive, thereby curbing demand somewhat. The ECB anticipates that inflation will remain below 1.7% and growth will be between 0.7 and 1.3% within the EU as a whole this year.
The Bank of England has kept the interest rate at 0.5% for a 15th consecutive month. Inflation in the UK hit 3.7% in April, nearly twice its target rate of 2%, but most analysts believe it will decline. The Organisation for Economic Cooperation and Development (OECD) has called for the UK interest rate to climb to 3.5% by the end of next year. However, if a week is a long time in politics, 18 months is an eternity in the current economic climate.