Rate move in US sparks fear of rises in Europe

THE US Federal Reserve is set to raise American interest rates this week, in a move which may well increase market nervousness about rises in European rates.

Wall Str eet analysts expect the Federal Open Markets Committee to agree on Tuesday that the key Fed Funds interest rate should rise by at least a quarter of a percentage point from its current levle of 4.25 per cent, in a bid to prevent inflationary pressures passing through into accelerating consumer prices.

Kit Juckes, an economist at Warburg Securities, said that a slowdown in US productivity and slightly quicker growth in wages meant that weak labour costs would not offset rises in raw material and intermediate goods prices for much longer. He predicted that US rates would rise by half a percentage point.

''A rise of only 25 basis points would leave the markets on tenterhooks waiting for the next increase.'

But Stuart Parkinson, at Morgan Grenfell, said that while employment was expanding rapidly and credit growth was buoyant, indicators of demand were weak. He predicted that these uncertainties would rule out a half-point rate rise, but leave the committee happy to recommend a quarter-point increase.

Figures on Friday showed US inflation running at a relatively modest 2.7 per cent. However, despite the attention given to the consumer price data, they are not as important as more forward-looking commodity market indicators - a fact Fed Chairman Alan Greenspan underlined early last week in explaining to the US Congress how the central bank sets interest rates.

The Bundesbank council meets on Thursday, with most analysts concluding from last week's rises in Swedish and Italian interest rates that another cut in the German discount rate is unlikely.

The Swedish and Italian moves triggered sharp falls in European bond markets, as dealers speculated on which central bank would be next to follow suit. The Swedish and Italian currencies remain under sharp pressure and investors are switching into the safe haven of the mark. The Swedish rise was the sort of pre-emptive bid to forestall inflationary pressure that Eddie George, Governor of the Bank of England, has said he would like to see here.

The Central Statistical Office will publish British inflation figures for July on Wednesday. These are expected to show the annual rate of retail price increases static at 2.6 per cent. The underlying rate - excluding mortgage interest payments - is forecast to rise fractionally to 2.5 per cent. Other figures are expected to show a further fall in unemployment and average earnings growth stable at 3.75 per cent.

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