Britain set to follow American interest rate rise

Interest rates were increased in America last week and could be rising soon in Britain too.

In America, the Federal Reserve increased interest rates by a quarter point to 5% in the 16th consecutive quarter point rise since June 2004. On the same day, the governor of the Bank of England, Mervyn King, appeared to signal a future rise in rates at the quarterly Inflation Report press conference.

Both initiatives come amid concerns about the build-up of inflationary pressures. In both countries there are worries about high residential property prices and rising energy prices.

Cormac Weldon, head of US equities at Threadneedle Investments, expects the Fed to pause before making further increases in America.

“Typically it takes between six and nine months for interest rates to have their full impact,” he says. “The statement from the Federal Reserve referred for the first time to slowness in the housing market and the lagged effects of previous rises. The fact that these factors were flagged up is significant.”

Weldon adds that a pause of several months would be likely.

Dilip Rasgotra, head of fixed income strategy at Credit Suisse Asset Management, agrees that a June pause is likely, highlighting mixed signals from American employment figures. While job growth was below the expected level in April, wages were stronger, with an increase of 0.5% in average hourly earnings.

According to Rasgotra, these “crosscurrents” will encourage a break in rate hikes. However, further rate rises could follow as the US economy continues to grow, he adds.