Interest rates policy through the world

Interest rates are a tool used by central banks in order to regulate the economy. Their policy has an impact on growth and inflation. Thus high interest rates enable government to avoid inflation, whereas low interest rates are used to enhance growth and avoid recession.

Different Central Banks do not all have same goal and policy. Let us have a quick look at the different institutions through the world.

· China
China has an impressive growth nowadays. Some specialists even claim this growth is too high; it might be only the result of speculation wave. If this theory is true, there might be terrible consequences for Chinese economy. In fact speculation could suddenly change. Speculative bubbles are quite unpredictable. A bad result announced by Chinese institutions could radically change the movement of the wave.
In order to diminish the euphoria, the central bank of China has decided to increase its interest rates. Thus Chinese are less willing to borrow money. However it appears that this rates policy in not able to control this euphoria. It will be interesting in the following years to see what happens to China. Will China become the strongest economy in the world? Or is China going to collapse?

· US
The Federal Reserve (Fed) aims to enhance growth and avoid inflation. However its main priority is the growth. During the reign of Alan Greenspan, the Fed slashed the interest rates to a very low level to avoid recession and thus to boost the economy. Consequently US economy developed quite rapidly this period.
Nevertheless more and more economists claim that this policy is the origin of the current crisis. Low interest rates encouraged people to borrow money to purchase home; homeownership was supposed to enhance security and stability. But the rise in mortgage foreclosures, fuelled by subprime lending, seriously threatened and undermined American efforts of stability and revitalization.
Bernanke, the new chairman of the Fed, decided to change regulation laws and to slash interest rates in order to improve the market mood after the credit crunch.

· European Union
The European Central Bank (ECB) focuses on avoiding inflation. It does not really care of the growth. This policy is maybe the result of previous huge inflation, which occurred between the world wars. European countries are quite afraid of inflation.
The governor of ECB is currently JC Trichet.

· Japan
On the other hand, the bank of Japan was obliged these previous years to fight against deflation. Thus they slashed interest rates to a very law level in order to boost the economy and encourage people to borrow money. Consequently the level of interest rates was 0% for a long while.