The US Federal Reserve eased fears of a further rise in US interest rates yesterday and left open the chances of a rate cut later this year. But in its latest inflation report, the Bank of England yesterday strongly hinted that British rates would increase by a further quarter percentage point by mid-year.
Addressing the US Senate's new Democrat-controlled banking committee for the first time, Federal Reserve chairman Ben Bernanke said yesterday that the chances of inflation rising in the future were "ebbing".
Economic analysis prepared by the bank suggests the US economy is now entering a phase of more moderate growth and lower inflation. Mr Bernanke said recent falls in oil prices had lowered the risk of future inflation and that so-called "core inflation" - which excludes the impact of changes in oil prices and fresh foods - was also moderating.
The euro rose to a fresh six-week high of $1.3126 as currency markets responded to prospects of lower relative returns on dollar assets.
However, a better than expected response by US consumers to recent falls in house prices lowers the chances that rates will fall. While interpreted as a sign take that the bank's options remain open, Mr Bernanke's remarks suggest the Fed is not yet concerned about any sharp slowdown in the economy
"Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid," Mr Bernanke said.
Former senior Federal Reserve economist and NUI lecturer Alan Ahearne said Mr Bernanke was content with the US economy.
"Growth is projected to be solid over the next two years, but moderate enough to take some pressure of capacity constraints which in turn will bring inflation back down into Bernanke's comfort zone," Mr Ahearne said.
The Bank of England yesterday forecast that a further quarter point rate increase would keep inflation close to the bank's target rate of 2 per cent.
"Market expectations are for one more quarter-point rate increase from the Bank of England in the first half of the year. We expect that increase to happen in March or April," Rossa White of Davy Stockbrokers said.
On top of an expected quarter of a percentage point rise in European Central Bank rates next month, strong growth data for Germany, France, Italy and Spain published on Tuesday suggests the ECB will signal a further quarter per cent rise in June at the Dublin meeting of its governing council next May.
