rates

The Federal Reserve left US interest rates unchanged at 2% yesterday, ending the most aggressive series of rate cuts in 20 years, as America tries to perk up its flagging economy and avoid a full-blown recession.

Fed Chairman Ben Bernanke said in a statement: “Although downside risks to growth remain, they appear to have diminished somewhat and the upside risks to inflation and inflation expectations have increased.”

It’s hoped that the central bank’s decision not to cut interest rates for the fist time in 10 months, will signal the start of an economic recovery for the US. This in turn could offer the UK economy a much-needed boost. However, with the costs of crude oil and commodities rising rapidly over the past year, the reality is that the risk of a recession continues to loom over the US.

The Fed said: “In light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.”

Many observers now expect US interest rates to remain unchanged over the next few months.

Economist James Knightly of Dutch bank ING said: “The outlook for corporate profits and therefore investment is deteriorating, with downside growth risks intensifying given market borrowing costs continue to rise despite the stable policy rate. The threat of a prolonged recession remains very real.”

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European Central Bank president Jean-Claude Trichet has implied that multiple eurozone interest rate rises were possible, after refusing to rule them out. The bank is widely expected to raise the cost of borrowing to 4.25% next month in a bid to counter inflation. This in turn could strengthen the euro currency further against the UK pound, which would increase the cost of buying property in the eurozone.

Trichet said: “I didn’t say that we could envisage a series of increases. That being said of course, we never pre-commit. The observers, the market, know that pretty well.”