US ups the rate of interest as UK inflation dips The gap is now just 0.25%. The Fed upped the US rate of interest yesterday to 4.25%, compared to the UK rate of 4.5%.

For most of last year, the UK rate of interest was three and a quarter percent higher than the US rate.

But the Fed’s run of upping the US cost of borrowing could be drawing to a close. The Federal bank changed its wording slightly yesterday. Okay, the change was subtle, but then that’s the nature of this particular beast.

The measured word is still there. The Fed is still tightening monetary policy in a ‘measured way,’ but this time the word ‘accommodative’ was dropped. Analysts are reading a lot into this omission, suggesting that the Fed believes the US rate of interest is approaching a neutral level, a point where it neither boosts or depresses demand from the trend rate.

Meanwhile, while the Fed ups rates, UK inflation is on the slide. According to the Office of National Statistics, the UK CPI rate has fallen to 2.1%, from 2.3% last month and 2.5% in September.

With UK inflation appearing to be on the march downwards again, the interest rate dove camp is becoming more popular. A growing number of economists are subscribing to the view repeatedly put forward by Capital Economics that the UK rate will see several falls over the next year or so.

It’s inevitable that the US rate of interest will overtake the UK rate in the next few months.

And what are the implications of that? It would seem the most likely side effect of US rates exceeding the UK rate is that Sterling will slide.

Editors note: Fed chairman Alan Greenspan has said he doesn’t like the term neutral rate of interest

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