Big rise in US rates imminent

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The Independent Online
A LARGE hike in US interest rates looks imminent, following a further slump in the dollar and growing fears that inflation is being stoked up by strong US economic recovery.

Most analysts believe the strength of economic recovery is putting irresistible pressure on the Federal Reserve to raise US rates before its next Open Market Committee meeting on 15 November.

'The way things are going, I'd be surprised if they hold out as long as the FOMC meeting,' said Roger Bootle, chief economist at Midland Montagu. 'I think they will go for a rise of 0.5 percentage points.' This increase has already been discounted by the markets and would have little effect in strengthening the dollar, which last week fell to its lowest level against the yen in recent years.

However, many Wall Street analysts believe US interest rates will have to rise by at least one percentage point by the end of this year to dampen the growing pressure on inflation. Some predict rates as high as 6 per cent, compared with the current 4.75 per cent. They argue that the Fed has already waited too long in raising interest rates to get away with a smaller increase.

Evidence of the strength of the US recovery is likely to be reinforced by next week's figures on trade and third-quarter GDP growth, which could show a robust rise of over 3 per cent.

An increase in US interest rates is likely to put pressure on Kenneth Clarke, the Chancellor, to raise British interest rates. 'The upward pressure in the US could lead to higher rates in the UK,' warned Douglas Godden, economist for the Confederation of British Industry. 'That would be of major concern, in particular because of the adverse effect it would have on business investment.'

Concern over US interest rate policy has sent the dollar sliding during the last few days. It closed on Friday at Y97.10 and DM1.499. The US currency has now fallen by 25 per cent against the yen since President Clinton came to office two years ago, although the administration has encouraged such movement this year to improve trade with Japan, which it believes is not co-operating on trade agreements.