5 June 2023 03:08 am
BBC: The US central bank has raised interest rates to the highest level in 16 years as it battles to stabilise prices.
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Jerome Powell |
The Federal Reserve increased its key interest rate by 0.25 percentage points - its 10th hike in 14 months.
That pushed its benchmark rate to between 5 percent and 5.25 percent, up from near zero in March 2022, although the Fed hinted the rise may be its last one
for now.
The European Central Bank has also raised rates again, although by a smaller amount than in previous months.
The ECB lifted its three key interest rates by 0.25 percentage points, whereas the three preceding meetings have all seen a larger rise.
In the US, higher rates have sharply raised borrowing costs, spurring a slowdown in sectors such as housing and playing a role in the recent failures of three US banks.
“We’re no longer saying that we anticipate” additional interest rate increases, Federal Reserve chair Jerome Powell said after the announcement, calling it a “significant change”.
However, he refused to rule out further action, saying: “We’ll be driven by incoming data.”
The bank started raising interest rates aggressively last year when prices in the US were soaring at the fastest pace in decades.
Higher interest rates make it more expensive to buy a home, borrow to expand a business or take on other debt. By increasing those costs, officials expect demand to fall and prices to cool off.
Since the Fed started its campaign, price increases in the US have shown signs of moderating.
In March, inflation, the rate at which prices rise, stood at 5 percent - the lowest level in nearly two years - though still uncomfortably high for the Fed, which is targeting a 2 percent rate.
Gregory Daco, chief economist at EY-Parthenon, said he thought the Fed would be “prudent” to pause now, noting that the risks to the economy as activity slows are growing.
“The fear of a recession is very much present in the economy today,” he said. “I don’t think the inflation battle is over, but we are in a situation where we’re seeing gradual disinflation and we’re also in an environment where interest rates are high and elevated and therefore should be constraining business activity, which should lead to further disinflation in coming months.”