Sunday, April 15, 2007

Question on UK Joining Euro

Reader's Question


If the UK were to enter the EMU at this stage, interest rates would fall and this could cause inflation?"


Current interest rates for the Eurozone are 3.75%.

The interest rate for the whole Eurozone is set by the ECB European Central Bank in Frankfurt. (1)

UK interest rates are currently 5.25% (2)

If the UK were to join the Euro we would have the same interest rate as the Eurozone area. Monetary Union involves a Common Monetary policy - interest rates set by ECB. Therefore interest rates would fall by 1.5%. This would be good news for those with mortgage payments. However if interest rates were to fall by 1.5% it would increase consumer spending and therefore could cause inflation.

Lower interest rates would have a big impact on the UK because we have high levels of debt. It would also have a big impact on the UK housing market. Lower interest rates are likely to increase the housing boom, which is not desirable given the already high levels of high prices.

See also:

Why UK will never join EURO


Costs of Joining Euro

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