International Interest Rate Comparison

Chart of the Week for September 22-28, 2006

A benchmark rate, such as the Fed Funds rate in the United States, is set by a central bank as a target interest rate among commercial banks for overnight lending. Benchmark rates play key roles in pricing loans, bonds, and other financial instruments. Central banks set it as part of monetary policy to adjust money supply, thus managing economic growth and inflation.

This week, the FOMC again held the Fed Funds rate steady at 5.25%. Despite this, after 17 consecutive rate hikes since mid-2004, the US has the highest central bank benchmark rate in the seven major industrial (G7) nations.

The situations in other G7 countries vary. The Bank of England currently has its benchmark rate at 4.75%, after a 0.25% hike in August. That was the first increase in two years as the UK's economy has suffered from the cooling real estate market. The Bank of Canada has left its benchmark rate unchanged at 4.25% since May. Although European Central Bank President Jean-Claude Trichet spoke of “strong vigilance” against inflation, indicating future rate hikes, its current benchmark rate only stands at 3.00%. Recovering from a long period of recession and deflation, Japan recently saw a rise in its key rate for the first time since 2000: in July, from near zero to 0.25%.

Looking forward, analysts predict the US will continue to have the highest benchmark rate among G7 countries into the end of 2006. On a bright note, this helps attract capital inflow from other countries to fund the increasing trade deficit.

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