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Business investment spending in the US has started to pick up but what is often unappreciated is that most of investment spending is simply replacing ageing equipment. Spending on new capital goods to actually expand capacity remains extremely low, and will need to rise if the US economy is to grow properly once more.
The ECB announced the Targeted Long-Term Refinancing Operation (TLTRO) in June as one of its measures to stimulate lending. The TLTRO is very similar to the Bank of England’s Funding for Lending Scheme (FLS), although the TLTRO’s terms are actually more advantageous for banks than those of the FLS. It looks like the ECB has tried to learn from the Bank of England’s experience, but it will take some time for TLTRO to have a discernable impact.
The responsiveness of the economy to interest rate changes will be crucial as central banks contemplate shifting to higher interest rates. The UK economy has tended to be more responsive to interest rates than the US, in part due to differences in the transmission mechanism through to households.
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