Will Cardoso Stand His Ground?

In 1964, by a narrow margin, British voters elected the first Labour government in 15 years. Its ministers followed up with a series of big spending plans to nationalize industries and expand social services. With investors and currency traders seeing the prospect of inflation over these plans, they quickly dumped the British pound. Investors fleeing is bad news, so the Bank of England decided to raise its discount rate to 7 percent from 5 percent, a huge jump.

For the uninitiated, the discount rate is the interest rate charged by a central bank on loans given to commercial banks and other financial institutions within its jurisdiction. It is essentially the rate at which commercial banks can borrow directly from the central bank in times of need.

Increasing the discount rate this way makes borrowing more expensive for banks and other financial institutions. By raising the cost of borrowing, the central bank aims to reduce the supply of money in the economy, which can help counteract inflationary pressures. This policy action can also attract foreign investors seeking higher returns on their investments, thereby supporting the currency.

Currency Conundrum: Johnson vs. Martin

Now, the Federal Reserve (as the central bank is called in the United States) had to do something so that dollars…