A major driver of global risk assets has been cheap money

Ian de Lange of Seed Investments writes that central banks around the world have maintained ultra low interest rates and for the most part this is continuing with two major central banks making announcements on their key interest rates today.

The big question for most central banks around the world is when to start to raise rates again. Typically they cannot easily lift rates in a world that is still trying to recover from a recession, but at the same time there is a concern about the implications of overstaying a position of ultra low rates.

Today, the Bank of England kept its key rate at the ultra low 0,5%, and maintained its bond purchase program on hold for the second month – i.e. elected not to extend any further cash injections into the economy. The UK’s growth rate came in at 0,3% for the last quarter of 2009. This supports low interest rates.

However inflation is running at 3,5% in the UK, which is way above the 2% target. The effects of inflation, ultra low interest rates, massive fiscal deficits and money injections into the economy have weakened the currency relative to others.

The chart reflects the dollar/pound exchange rate

The European Central Bank also met today – as was expected it left its key rate unchanged at 1%. This was the 10th consecutive month at this level. Inflation is low at 0,9%, while GDP for the Eurozone gained just 0,1% in the last quarter of 2009. The big risk for these economies is that inflation starts to pick up, growth goes into reverse, putting more on more pressure on the fiscal positions and long term debt structures. But cheap money is good for real asset prices.