Promising Inflation Figures, Rates Cut Likely

The rate of inflation in the US grew by a small margin than analysts had expected over the course of the last month, according to figures released today.

In official consumer price figures, prices have grown over the month of July, but even still fall below the rate of growth many analysts had forecast for the same period.

Based on the Federal Reserve’s specifically preferred inflation guide, prices grew by just 0.1%, in the face of widespread predictions of 0.2% of growth. The news is thought to increase the likelihood that the Federal Reserve will cut interest rates at their next meeting, to encourage economic growth and help ease the liquidity situation in the banking sector.

By cutting interest rates, the Federal Reserve will lighten the load on mortgage holders to ultimately reduce the number of repossessions tying up bank liquidity. Additionally, by enabling inter-bank borrowing at a more favourable rate, a rate cut can help banks ease their short term liquidity problems.

Many analysts believe the Federal Reserve have an established target of between 1-2% for inflation, in which they are well settled at the present moment. With interest rates sitting at 5.25%, they are poised for a cut within the next few weeks, to lower the cost of borrowing on a variable mortgage.

Ben Bernanke, Chairman of the Federal Reserve, also added to speculation of an impending rates cut today by promising to maintain stability in financial markets through its powers, alongside President Bush and his new measures to help ease regulation for struggling lenders.

The news of the likely interest rate cut was well received on the Dow Jones today, helping to thrust trading into green territory. With the possibility of interest rate cuts looking far more likely, investors are returning to the stock market after last week’s sell-offs.

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