American growth fuels interest rate fears

THE US ECONOMY grew at a far faster pace last year than first thought, official figures revealed yesterday, fuelling fears in world markets of a rise in US interest rates.

According to the Commerce Department, US gross domestic product grew at an annualised rate of 6.1 per cent in the fourth quarter of 1998, not, as previously estimated, at 5.6 per cent. A better-than-expected export performance and higher business investment lay behind the revisions, analysts said.

The stunning growth rate, which is more than three times the corresponding measure in the UK, sparked speculation about higher US interest rates. In New York, the Dow Jones fell 72.53 points to 9293.81 by the mid-afternoon, with concerns about the outlook for technology stocks also weighing on sentiment. The unease on Wall Street spilled over to London, where the FTSE closed down 31.4 points at 6175.1. Other major European bourses also ended lower, although prices in the US bond market, which suffered heavy losses on Thursday, held steady.

Not all analysts were convinced that interest rates would necessarily rise in the US, where the inflationary outlook remains relatively benign. Several drew attention to yesterday's GDP deflator, a widely-followed measure of inflation, which rose at an annualised rate of 0.7 per cent, the smallest increase in four decades. Richard Iley at ABN Amro said: "With whole economy inflation - according to the gdp price deflator - continuing to hit new lows, the Fed can afford to sit tight for the time being."

Meanwhile, Lawrence Summers, the US deputy treasury secretary, sent the dollar higher against the yen after he urged Japan to stimulate growth via looser monetary policy. Mr Summers said Japan should not rely solely on a weaker exchange rate.