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Sterling Decision |
9 February 2004
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British Rates Rise, ECB Holds Steady
If there were any further proof needed that Britain has made the right move in staying out of the eurozone, last week provided it. With the British economy heating up nicely, the Monetary Policy Committee of the Bank of England raised interest rates for the second time in three months to 4.0%. Meanwhile, the European Central Bank decided to hold rates in the eurozone steady as Germany, France and other economies are still sputtering a bit.
As a matter of fact, it is pretty easy to make the argument that the ECB should have cut its rates a little. The appreciation of the euro against the US dollar is nothing the Yanks are worried about, but those in the eurozone who export to the US are screaming in pain. A small cut would have signaled to the currency markets that enough was enough, and it would have slowed if not capped the euro's rise.
Meanwhile, the British economy, fourth largest in the world, does seem to be seeing the first signs of inflationary pressures. The price of a first-time home crossed the 100,000 threshold recently, and flexible-rate debt is much too high for the comfort of the MPC. A slightly the bump in interest rates will boost the pound against both the dollar and the euro, and this will put some pressure on exports. However, the entire idea is to slow down the British economy, so this is actually a benefit.
Britain's economy continues out of phase with the Continent, and until such time as that changes, the UK must keep its currency independent. If the eurozone included the UK at this stage, monetary policy would be far too loose, and any benefit that the rest of Europe might have from a booming British economy would be cut short as inflation in Britain stomped on the brakes rather than the light tap the BOE just made.
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