Global upturn forecast as US Fed prepares for change in rate policy

This week will herald a major turning point for the global economy as the US central bank drops its concerns over economic weakness and Sweden becomes the first Western central bank to raise interest rates.

Speculation of a rate rise in the UK is also likely to be fuelled by research from the Bank of England showing government statisticians have continually underestimated the strength of economic growth. The move will cast doubt on the latest figures showing the UK economy ground to a halt last year.

America's Federal Reserve meets tomorrow night amid growing evidence the world's largest economy is emerging from its sharp downturn. Manufacturing has climbed out of recession and economic growth at the tail-end of last year has been revised sharply upwards.

The Fed is widely expected to drop its "bias" towards rate cuts. For more than a year the central bank has warned that the risks are tilted towards economic weakness.

Most economists expect it to abandon this bias after tomorrow's meeting, when it is also forecast to keep rates at their 40-year low of 1.75 per cent. Analysts see this as the first step towards the first raising of US rates since May 2000. The markets, which are pricing in rates of 3 per cent by the end of 2002, expect the first hike this May.

Meanwhile the Swedish Riksbank is expected to become the first central bank in Europe, and the first major one in the world, to break the downward cycle and raise rates later tomorrow.

"It is going to be an eventful week for markets with the Fed moving from easing to neutral and Sweden beginning the upward march as the first European bank to hike rates," said David Brown, the chief European economist at Bear Stearns. "This will mark the beginning of the end of central bank easing in Europe."

The European Central Bank, which sets rates for the 12 euro nations, meets on Thursday, but no interest rate announcement is scheduled.

The Bank of England does not meet to set rates until 3 April and recent comments and speeches by members of the Monetary Policy Committee have pointed to rates staying on hold at their 38-year low of 4.0 per cent for some time.

However, research by a Bank economist published today shows the expenditure measure of GDP has, on average, been underestimated by 0.2 percentage points.The latest estimate for the last quarter of last year showed zero growth, ending a record 27 successive quarters of growth. However, some analysts believe this figure will have to be revised up.

Michael Saunders, at Schroder Salomon Smith Barney, said: "If anything, risks may lie more to the upside, given the possibility that recent GDP data may be revised up."

Danny Gabay, a UK economist at JP Morgan, said he believed inflation could hit 3 per cent by the end of this year, well above the Bank's 2.5 per cent target.

Meanwhile a separate study showed both the US and UK technology sectors had come out of recession. The Centre for Economics and Business Research, said spending on technology investment, which slumped by 17 per cent in the last half of 2001, had since picked up. It is expected to rise by 2.5 per cent during 2002.

The Bank of Japan also holds its policy meeting tomorrow and Wednesday but with no change in policy expected. It has been pumping money into the market in an effort to halt declining consumer prices and further shrinkage of the economy.