US interest rate rise for the first time since 2006 by 0.25%Make Text Bigger
Yesterday Janet Yellen, the Chair of the Board of Governors of the Federal Reserve System, announced that the US interest rate will increase by 0.25%. This is the first increase since 2006 and since 2008 the rate has been around 0%.
This means that the range of rates US banks offer to lend to each other overnight, called the the Federal Funds rate, is to be between 0.25% and 0.5%.
This is a good indicator that the US economy is growing at a sustained rate and projected growth by the US Central bank for next year increased slightly from 2.3% to 2.4%. with increased household spending and investment by business.
Janet Yellen said: “The committee judges that there has been considerable improvements in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2% objective.”
It is expected that there may be further small rises next year to in order to make sure there is no ‘overheating’ of the economy leading to inflation above the 2% target.
There are fears by some that a US rate rise will strengthen the Dollar against the Pound and force inflation higher in the UK by making imports, especially oil, more expensive. However, it is also a deflationary pressure by cooling US growth and demand so the two will likely have a counter balancing effect.
The Bank of England were obviously aware of this possibility and with UK inflation only just reaching a positive figure of 0.1% this November, far short of the medium term goal of 2%, there still no projected need to increase the UK interest rate.
The CBI director of economics, Rain Newton-Smith, said “alongside the US, the UK has been one of the best-performing advanced economies in recent years, but the Bank of England probably still has a way to go before rising inflationary pressures at home persuade it to follow and up interest rates.”
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