Upturn in employment sets the scene for rise in US rates

Federal Reserve may now make its move amid fears over impact on developing world

US interest rates looked set to end years at record lows and start rising as soon as next month, after data showed another big improvement in employment.

While the Bank of England signalled on Thursday that it would be delaying any rate rise due to continued low inflation, Washington’s Federal Reserve is now likely to start tightening monetary policy rapidly following yesterday’s release of so-called “non-farm payroll” data.

US employers hired 215,000 more workers in July, while the unemployment rate stayed at its seven-year low of 5.4 per cent, from which economists and investors assumed that the Fed would now see little reason not to put up rates next month.

Only last week, Fed chair Janet Yellen and her colleagues issued a statement that the central bank needed to see “some further improvement in the labour market” before making its move.

Researchers at Capital Economics said the figures were “easily enough to keep the Fed on course for a September lift-off.”

Many others agreed, notably the so-called “Fed whisperer” Jon Hilsenrath, a Wall Street Journal commentator whose accuracy on such forecasts has proved uncanny. He said that even if the employment numbers had been disastrous, rate setters were still minded to raise rates soon.

While such a move would send a signal that the US is firmly back in growth mode, the return to more normal rates in the world’s biggest economy will have serious implications for other parts of the world where recovery remains shaky.

Chris Williamson of Markit said higher interest rates will particularly hit emerging economies. “Countries with a lot of dollar debt will find it increasingly difficult to afford their interest repayments. We’re talking Russia, Brazil, South Africa, Turkey,” he said. This in turn will affect the global economy, Mr Williamson warned, adding that there was a danger US rates would begin to rise just as the world’s economy was struggling.

Not all economists were convinced the payroll figure was high enough to make a September rise an absolute certainty. The figures were lower than some estimates, leading a minority of economists to conclude they were not adequate to qualify for the Fed’s “some further improvement” trigger.

As for the outlook for UK interest rates, the Dep-uty Governor of the Bank of England, Ben Broad- bent, declared yesterday there was no urgent need to raise rates.

Explaining his decision to vote for a freeze at this month’s meeting of the Monetary Policy Committee, he said: “As I saw it, I didn’t think there was any urgency.” He added that the committee was “some way away” from a rate rise, due to the lack of inflationary pressure.

Michael Saunders at Citigroup wrote to clients to say he was “broadly” in agreement with the Bank of England’s Inflation Report, that: “The UK will enjoy a golden scenario of solid real growth, low unemployment and low inflation for the next two to three years.”