By: Dr. Mike Campbell

The chairman of the Federal Reserve, Ben Bernanke, has stated that the higher energy costs stemming from the “Arab Spring” are likely to have a negative effect on US growth this year. Trouble in Libya, a regime change (well...) in Egypt and tensions in other parts of the Middle East have pushed the price of oil higher. Brent Crude oil started the year close to the $93 mark. At the height of the turmoil in the Middle East, it had risen to over $126 and has since fallen back to $113.21. The higher costs of oil have fed into developed economies around the world and are eroding the still fragile recovery that the developed world has seen since the global financial crisis.

Mr Bernanke has suggested that the higher costs will lop 0.4% of the USA’s projected growth figures for the full-year. The projection now stands at 2.7 to 2.9%. He predicted that full-year inflation will moderate to 2.3 to 2.5 and that unemployment will ease slightly to between 8.6 and 8.9%.

The Federal Reserve also decided that interest rates would remain on hold at 0 to 0.25%, where they have been since December 2008. It indicated that the policy was likely to continue for the foreseeable future. Many central banks have adopted a policy of “cheap money”, by keeping their interest rates near historical lows. The idea is that business will be able to borrow money cheaply, permitting it to expand and thereby spur economic growth. It is fine in principle, but, nearly two years in, the results have been less than spectacular. It is true to say that the situation could have been much worse today had the central banks not taken this course.