“An exciting week just before the Christmas holidays,” says Joost Derks, currency expert at IbanFirst. “Where it usually gets a little quieter.”
Lowering inflation in the US
It was announced yesterday afternoon that US consumer prices rose 0.1 percent, the lowest inflation in nearly a year. The question is what effect that might have on upcoming interest rate decisions. “Right after these numbers were announced, you saw the markets start to factor in the Fed’s baby steps. You saw it right away in the exchange rates.”
The Fed should therefore decide tonight to raise interest rates by half a percentage point. “They indicated that the risk of inflation is greater than the risk of a recession,” Derks says. “A recession can be tackled with interest rate cuts, but inflation is much more difficult.”
persistent inflation
And this problem also occurs in the Eurozone, where “persistently high” inflation also needs to be reduced. Derks therefore expects the European Central Bank to raise interest rates by half a percentage point here as well. “There is also the possibility that interest rates will go up 0.75%, just to bring inflation down.”
To get the economy going again, cooperation between central banks and the government is needed, Derks says. ‘We have seen in the UK that the consequences of poor cooperation can be disastrous. Fortunately, that collaboration is now taking off there.’