The United States Federal Reserve raised its key federal funds rate by a quarter percentage point to 2% at 9 o'clock this Wednesday evening (Bucharest time). The move, which was anticipated by analysts, is the fourth in a row in the US in the last five months.
This places the US rate on a par with that of the Central European Bank. The European institution has kept its interest rate unchanged for the last four years. This level is considered a satisfactory compromise, which neither hinders economic development nor encourages inflation.
The increase of the rate by the Fed comes at a time of upturn in the US economy.
Analysts say the clear-cut victory for President Bush in last week's election paved the way for a rise. Some economists warn a further rise could be in store for December, with the annual rate increasing to 2.25%.
The Fed's Open Market Committee, which decides interest rate policy in the US, voted unanimously in favour of a quarter point rise. The Fed had been gradually easing rates up since the summer, with quarter percentage point rises in June, August and September, at the same time acting to restrain inflationary pressures while being careful not to obstruct economic growth.
The US Federal Reserve did not rule out raising rates again in December but noted that "any future increases will take place at a measured pace."
The American economy grew 3.7% in the third quarter of the year, with US firms creating 337,000 jobs.
"The (American) economy is doing a bit better right now but there are still some concerns about geopolitics, employment and the price of oil," said Sung Won Sohn, with Wells Fargo Bank.
The market was quick to react to the announcement by the Federal Reserve, with financial analysts broadly welcoming the move and shares trading largely flat.
Following the optimistic statements about the US economy, the dollar gained some ground against the euro on international markets. The dollar-euro exchange rate dropped slightly to 1.2880 from the all time high seen on Wednesday of 1.3.
The Bank of England also raised its benchmark interest rate by half a percentage point.
The House of Lords said that was more than needed, boosting the pound and keeping inflation very low.
"The persistence of inflation below target and the continued apparent absence of strong demand are evidence that interest rates have been kept too high," stated Lord Maurice Preston, chairman of the House of Lords Economic Affairs Committee.
Unlike the Central European Bank, the Bank of England raised its benchmark interest rate five times in a year to 4.75%. Inflation in the UK slowed to 1.1% in September, below the 2% target.
The Central European Bank chairman Jean-Claude Trichet talked recently of a possible increase in interest rates in December. According to Trichet, the risk of inflation is the main reason for concern, particularly because of the gradual rise in petroleum prices.
The increase in the Fed's interest rate will make borrowing in dollars more expensive. These increases will show throughout the entire world, including in Romania, though the intensity of the effect will vary. The average interest rate for loans in dollars was 9.5% in September, according to the National Bank of Romania. This is set to increase, though it remains to be seen by how much.
liviu.chiru@zf.ro ; andreea.paun@zf.ro
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