US raises interest rates by 0.25%

Ryan Bembridge

December 17, 2015

The US Federal Reserve has raised interest rates by 0.25% – signalling an end to nearly a decade of rock bottom rates across the pond.

Rates have been at 0.25% in the US since 2008, but yesterday it was announced that the board of the US Federal Reserve unanimously voted for an increase to 0.50%.

The move will increase the pressure on the Bank of England’s Monetary Policy Committee to raise UK interest rates.

The Fed’s decision is a reverse of the European Central Bank’s move at the start of the month to cut the key deposit rate to -0.30% and extend its quantitative easing programme by six months to March 2017.

Samuel Tombs, chief UK economist at Pantheon Economics, said: “Fundamentally, the MPC can’t ignore the exchange rate between the UK and US because it has an impact on inflation, such is our reliance on imports.

“The UK labour market is comparable to the US with the unemployment rate down to pre-recession levels and wage growth generally strengthening.

“I still think we are looking at a second quarter rate rise which would be six months behind the US, in line with precedent.”

But Scott Bowman, UK economist at Capital Economics, doesn’t think the Federal Reserve decision will have much of an impact.

He said: “The MPC has said it will focus on the domestic economy so I don’t think the Fed raise should have too much of an impact on the UK decision.

“The market may think a rate rise will happen in late 2016 but we think it will be in the second quarter of 2016. One or two of the MPC members have recently come out and suggested that market pricing is not indicative of when rates will rise.

“The MPC is caught in the middle at the moment between the Fed which is increasing rates and the ECB which is easing policy.”

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