The clear divergence in economic growth between the USA and Europe has become more apparent with announcements from leaders of the central banks on both sides of the Atlantic.
In her clearest indication yet that interest rates are set to rise in the US this month, Federal reserve chair Janet Yellen described how the world’s largest economy had recovered ‘substantially’ since the downturn.
While her counterpart at the European Central Bank (ECB), Mario Draghi, cut the deposit rate to a record low of -0.3% and cleared the way for further quantitative easing until at least March 2017.
Yellen described growing consumer spending as solid and that she is looking forward to tightening monetary policy.
“The economic growth we are seeing is enough to push the job market towards full employment and start pushing up inflation towards our desired 2% annual target,” she said.
Clear signals of US interest rate rise on the way
“No decision about putting up interest rates has been taken and the decision still depends on the right economic data, but we can see more people are moving into full time work and rising wages, which all boost the economy.”
Yellen argues that the underlying inflation rate in the US was around 1.5% to 1.75% when adjusted for falling oil prices, but the effect of low fuel and energy costs will work their way out of the figures over the coming months.
The US interest rate has not seen an increase in 10 years.
Europe still languishing in financial doldrums
Meanwhile, the single currency zone in Europe is going through more miserable times.
Inflation is stubbornly low. Forecasts of a 1.1% rise in the cost of living next year and 1.7% in 2017 have already been downgraded to 1% and 1.6%.
Eurozone inflation remained static in November at 0.1%.
The ECB is still dogged by infighting over the £780 billion asset purchase programme. The Germans are bearing much of the financial brunt of the policy as government bond prices that have resolutely remained stable for years started to drop towards negative yields.
“Our strategy is working as credit conditions and the financial markets have improved, but the process is slow and will have to continue for a long time,” said Draghi.
“We need to push on and Eurozone countries need to recalibrate their policies.”
