US cuts interest rates despite inflation risk

The US central bank has cut interest rates for a third time, despite concerns that the move will deliver a boost to the economy that risks re-igniting price inflation.

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The decision was expected, setting the Federal Reserve’s key lending rate in a target range of 4.25% to 4.5%.

That is down a full percentage point since September, when the bank started lowering borrowing costs, citing progress stabilising prices and a desire to head off economic weakening.

Reports since then indicate the job market has been more resilient than expected while price rises have continued to bubble.

Inflation, which measures the pace of price increases, stood at 2.7% in the US in November – up from 2.6% a month earlier.

Lower interest rates stoke economic activity by making it easier to borrow. This can encourage businesses to invest or expand and households to spend on items such as cars. But if demand rises, higher prices typically follow.

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Fed officials – who want to see inflation of about 2% – have said they are aware of the risks.

On Wednesday, forecasts released by the bank showed policymakers adjusting their plans to cut rates less next year than anticipated just three months ago.

The bank’s key rate is now expected to fall to 3.9% by the end of next year, instead of the 3.4% previously predicted.

Meanwhile, inflation is forecast to stay higher at about 2.5%.

John Ryding, chief economic advisor at Brean Capital, said he thought it would have been wiser for the Fed to hold off on a cut at this meeting, even if it risked upsetting markets expecting a cut.

“There has been enormous progress made from the peak in inflation to where the US is now and it risks giving up on that progress, possibly even that progress being partially reversed,” he said. “The economy looks strong… What’s the rush?”

The Fed’s announcement comes a day before the Bank of England is due to make its latest interest rates decision in the UK, where price inflation has also recently ticked higher.

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It is widely expected to hold its benchmark rate steady at 4.75%.

Monica George Michail, associate economist at the National Institute of Economic and Social Research, said the Bank of England was facing rates of wage growth and price increases for services that are hotter than in the US.

Some of the government’s plans, which include hikes to the minimum wage, will also put pressure on inflation, she added.

“The Bank of England is trying to remain cautious,” she said.

But she warned that inflation risks are present in the US as well, where president-elect Donald Trump has backed policies such as widespread import tariffs.

Mr Ryding said he thought the Bank of England – which unlike the Fed, does not have to consider unemployment as part of its mandate – was more clearly responding to the reality of the inflation situation in front of it.

“The Bank [of England] is being more of a prudent central bank than the Fed is right now,” he said.