Central Bank Report: US and UK
- 5 hours ago
- 2 min read
By: Peter Ort, The Quinnipiac University Economics Research Team
Photo by: Markus Kammermann
The Bank of England currently reports a 3.75% bank rate (interest rate without risk premium) with a CPI inflation rate of 3.4% despite a 2% target rate. In the most recent meeting, February 4, the Monetary Policy Committee voted 5-4 to maintain the current rate, as opposed to decrease it by 0.25. The main reason for contention on reducing the bank rate is because of the expectation of CPI inflation to fall all the way back to the target by April. Monetary policy aims to reach the inflation target within the medium term (5-15 years) while reducing bank rates in the near future.
The Federal Reserve currently reports a target range of 3.5-3.75% for the federal funds rate (interest rate without risk premium) and a PCE inflation rate of 2.8%, with a target of 2%. Alternatively, the Fed is targeting inflation of 2% over the long run (15+ years), compared to Bank of England’s medium run. The most recent Federal Open Market Committee meeting was January 27-28 where they held interest rates constant and the next meeting will be March 17-18.
Monetary policy from both central banks indicates an expected decrease in inflation, which is why they are both slowly decreasing interest rates in the future. However, there is an important distinction that needs to be made for the type of inflation that each bank is targeting. The Bank of England is targeting CPI (consumer price index) inflation, which is the average change of prices over time for a given basket of goods/services for consumers, such as food and housing. The Federal Reserve is instead targeting PCE (personal consumption expenditures) inflation, which accounts for CPI measurements as well as consumer substitution to cheaper goods, so numbers for PCE inflation will typically be higher than CPI.
We will continue to track and compare UK and US monetary policy as they are two of the leading economies and trend-setters in monetary policy, followed by policy makers worldwide.
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