Britain, Japan keep rates steady

In a move consistent with a trend towards tighter monetary policy, the Bank of England voted yesterday to keep its key repo rate…

In a move consistent with a trend towards tighter monetary policy, the Bank of England voted yesterday to keep its key repo rate at 4.5 per cent, in spite of expectations that it might cut rates.

The Bank of Japan (BOJ) also kept its monetary policy unchanged yesterday, maintaining its interest rate at 0 per cent. But in a preparation for future rate increases, it brought to an end its five-year long policy of stimulating lending by expanding bank reserves.

The BOJ's so-called "quantitative easing" policy has been in place since 2001 when a credit crunch threatened to damage the Japanese economy. Its ending reflects the BOJ's desire to gradually tighten monetary policy as Japan's economy improves.

Irish economist Alan Ahearne - who served as an adviser on the Japanese economy to the US Federal Reserve - said the moves signified a worldwide turning point in monetary policy.

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"We're seeing a pattern of rising interest rates around the world - the US, Europe, and now the prospect of interest rate increases in Japan. The era of historically low global interest rates is over. The Bank of Japan has been itching to end its policy of quantitative easing for years and to increase interest rates to what they consider normal levels. The strong economic data coming from Japan recently have given the Bank of Japan the excuse it needed to move."

Mr Ahearne added that the BOJ should be prepared to permit inflation to rise above 2 per cent to "deal with the government's crushing debt burden".

Meanwhile the latest monthly bulletin of the European Central Bank (ECB) hinted that interest rates could increase again in the euro zone before the summer. The ECB said it remained worried about the risk of inflation in coming years: "[ T]he economic analysis indicates that risks to price stability over the medium term remain on the upside."