Today we saw an excellent example of the different priorities of the Bank of England (BE) and the European Central Bank (ECB). For the BE the key is to continue to support the level of economic activity in the UK. So despite the level of consumer price inflation remaining well above the target level the Monetary Policy Committee made no change in interest rates which have been at 0.5% for over two years. In contrast the Governing Council of the ECB has raised interest rates from 1.25% to 1.5% in an attempt to reduce the level of inflationary pressures across the 17-nation eurozone. The ECB's President Jean-Claude Trichet sought to explain this move by saying that inflation, now 2.7%, was likely to remain "clearly above the ECB's 2% target over the coming months". In a clear warning about the future he said inflation would be monitored closely in coming weeks and this has been seen as a signal that rates are likely to go even higher. The ECB's rise was widely anticipated with their economists being concerned about the possible "upside risks" to inflation in the medium term.
Jul 7, 2011
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The Bank of England and the ECB have different aims when it comes to their view on influential impacts on the economy. The Bank of England has kept interest rates at a record low level of 0.5% despite the consumer price inflation being above their target level. They are hoping the low interest rate will motivate consumers to spend rather than save. This will lead to injections into the economy as opposed to the withdrawals it has been facing. They are doing this to urge economic activity and promote growth in the economy.
The ECB on the other hand has increased interest rates by 25 basis points to 1.5% from 1.25% considering that they are aiming to hit a target inflation rate of 2%. Currently the rate of inflation is at 2.7%. The ECB will continue to tighten monetary policy in order to meet the target for harmonised consumer price. An increase in interest rates will attract investment and borrowing and at the same time reducing cost push inflation therefore boosting the economy.
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