US holds interest rate at two per cent
Federal Reserve chairman Ben Bernanke has kept US interest rates at two per cent
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Wednesday, 25, Jun 2008 07:42
The US Federal Reserve has held interest rates at two per cent on concerns inflation is rising.
It is the first time in ten months the Fed has failed to reduce interest rates at one of its regular meetings.
The US central bank said labour market conditions have softened further and the financial markets remain under considerable stress.
"However, 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," the Fed said in a statement.
This increase in inflation expectations led the committee to decide to hold rates steady rather than cut them any further.
Inflation should moderate later this year and next year, according to the statement.
At the same time, while "downside risks to growth remain, they appear to have diminished somewhat" the committee added.
The Fed went on to warn: "Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters."
No change was expected this time round, as the central bank had to strike a balance between rising inflation and a slowing economy.
However, analysts will be looking carefully at the accompanying comments to try and work out which way future rate hikes may go.
An emphasis on controlling inflation and a "diminished" risk to economic growth could be seen as a sign that more rate cuts are unlikely for the moment.
The Organisation for Economic Cooperation and Development (OECD) has urged the US government, among others, to hold its interest rate steady in order to control inflation.
The UK's central bank, the Bank of England, faces a similar dilemma and also chose to hold the interest rate last month, at five per cent.