Friday 21 October 2016

US interest rates raised for first time in a decade

Holly Williams and Colm Kelpie

Published 17/12/2015 | 02:30

US Fedeeral Reserve chairperson Janet Yellen. Photo: Reuters
US Fedeeral Reserve chairperson Janet Yellen. Photo: Reuters

The Federal Reserve has increased US interest rates for the first time in nearly a decade, marking a milestone in the recovery of the world's biggest economy.

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Interest rates in America have not been increased since June 2006 and have remained at a target range between zero and 0.25pc since December 2008. But the Federal Reserve last night raised its key interest rate by 0.25pc, ending seven years of near-zero rates.

The move by the US central bank means that the dollar could increase in value, making it more expensive for Irish holidaymakers to visit America.

The dollar has already strengthened considerably versus the euro over the past year.

Yesterday, €1 could buy $1.09, compared with around $1.25 this time last year.

John Moclair, head of retail treasury sales at Bank of Ireland, said a stronger dollar could also make Ireland a more attractive tourist destination for US visitors.

"As has been the case for the last 18 months, any further strength in the US economy, and normalisation of interest rates there, will most likely be accompanied with a strengthening of the purchasing power of the US dollar," he said, in advance of last night's announcement.

"As one of our main trading partners, a further slide lower in the EUR/USD exchange rate will continue to underpin Ireland's export competitiveness while making Ireland a more attractive tourist destination for American travellers in 2016."

The decision by the Federal Open Market Committee (FOMC) is a sign the US economy is back on track after the financial crisis and ready to wean itself off the financial life support of record low rates.

There have been encouraging signs for the US economy in recent months, with unemployment falling to 5pc from a peak of 10pc in 2009 and inflation beginning to creep up, with figures showing a bigger-than-expected rise in prices of 0.5pc in the year to November.

Stock markets have surged in the past two days ahead of the decision, which will end many months of uncertainty over US monetary policy. Equities fell sharply in September after the Fed made the surprise decision to keep rates on hold, confounding expectations for a rise.

But the milestone decision to hike the cost of borrowing in the US comes at a time when the global economy and China's growth have been slowing.

There are concerns that a rise will compound the slowdown, as higher rates in America would lead to a stronger dollar and this in turn would put pressure on emerging markets, where many companies borrow in dollars.

The hike would also see US and European monetary policy move in opposite directions. The European Central Bank earlier this month announced a cut to overnight deposit rates from minus 0.2pc to minus 0.3pc and extended a €60bn stimulus programme by six months. Meanwhile, the Bank of England this month voted to keep rates on hold at 0.5pc.

Irish Independent

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