Interest rates in America maybe cut - why it’s good news for Brits

Filed Under Finance

Following intervention by George Bush, the head of the US Federal Reserve has hinted that a drop in interest rates may be on the cards for America soon.

There is real concern in the US that the sub prime housing problems could tip the country into recession, forcing many lenders out of business and increasing the turmoil in the financial markets.

Whilst the economy in the USA might seem disconnected from our every day lives in the UK, a reduction in American interest rates will be good news for Brits for the following reasons:

If America’s economy moves into recession, it could trigger a recession world wide so by averting recessionary pressures in the US, we could be spared the pain of reduced growth in the UK.
Greater stability in the US financial markets will also help reduce jitters in other finance markets worldwide. Recent falls in stock markets could be reversed as the fear of recession recedes.
Reducing interest rates in the US could present an interesting dilemma for the Bank of England as the US dollar will fall in value against sterling. Whilst great for those travelling to the USA, UK manfacturers will struggle even more to sell their goods to American customers as they become too expensive because of the strength of the pound against the dollar. If the Bank of England raise UK interest rates in their battle against inflation, the pound will strengthen even more against the dollar, harming UK manufacturing. A fall in US interest rates will make it harder, though not impossible, for the Bank of England to raise interest rates in the UK to rise.

So as long as inflation doesn’t rise if interest rates stay where they are, a cut in the cost of borrowing in the US could be welcome news for us Brits.