Rising global inflation fears, fueled by higher prices of oil, food, and commodities led most of the governments and central banks in major developed economies to rethink their monetary policy, and turn restrictive. On 7 April, ECB President Jean-Claude Trichet fulfilled his promise and raised interest rates to 1.25%. The central bankers of Australia, U.K., and Canada also expressed willingness to do so.
U.S. Monetary Base Expansion
Chart provided by: CEIC Data
Despite the rising inflation concerns and global tendency of leading central banks to implement restrictive measures, the U.S. Federal Reserve continues its expansionary monetary policy. In March 2011, Ben Bernanke announced that the Fed will keep interest rates near record low levels for several more months as the recovery of the economy still remains fragile. In March, the Fed funds policy rate dropped to 1%, the lowest since June 2010.
In addition to lower interest rates, the Federal Reserve continues to stimulate the economy by rapidly increasing the money supply. Following the 2008 financial crisis, the Fed was forced to finance the huge fiscal deficit that resulted from the massive social programs and rescue funds of the Obama administration. In March, the monetary base, which is fully controlled by the central bank, reported over 15% growth, compared to the same month of the previous year.
By Alexander Ivanov in Bulgaria – CEIC Analyst