Bank and Fed on standstill

IT'S a big week for monetary policy decision makers on both sides of the Atlantic, but don't expect any fireworks. The US Federal Reserve is likely to leave US interest rates on hold at 1.75% today, while on Thursday the Bank of England's Monetary Policy Committee should keep domestic rates unchanged at a 38-year-low of 4%.

Wall Street fell 85 points on Friday and dropped a further 198.59 points on Monday. There remains a lot of anxiety about the pace of economic recovery and corporate profits.

The Fed's decision will come on the back of a disappointing April payrolls report on Friday. It showed that the US unemployment rate jumped to 6% - the highest in more than 7 1/2 years - while new jobs rose for the first time this year after previous gains were revised away.

Fed chairman Alan Greenspan, fully aware that higher US rates would only increase the strain on the rest of the world economy, is in no rush to tighten. He will want to be assured that the labour market has bottomed out and that the economy is back on track for faster recovery. World stock markets will be scrutinising any accompanying statement for clues about whether the Fed will keep rates on hold next month as well.

Broker Bear Stearns reckons the Fed will keep its powder dry until September, when it should start to see better signs of stronger US economic momentum, and especially while inflation pressures remain so benign.

In Britain, recent remarks by members of the Monetary Policy Committee, which celebrated five years of independence on Monday, suggest UK interest rates are at the correct level. Bank of England Deputy Governor David Clementi said the rise in house prices was not causing undue concern within the Bank. Several reports suggest the UK economy is picking up strongly.

A rise in UK rates is inevitable but is likely to be aimed at producing a gentle slowing in consumer spending growth rather than bringing it to an abrupt halt. Most economists think rates will rise in August and finish the year at 4.5%.

European Central Bank President Wim Duisenberg raised eyebrows within the eurozone when he warned about 'risks to price stability', suggesting rates may have to move higher soon. The ECB left its benchmark lending rate unchanged at 3.25% last week.

A strike by workers of the IG Metall union in Germany in support of a 6.5% wage demand is worrying for the ECB. It could back up verbal intervention with tighter policy.