Markets Rise on US Interest Rate Increase

Markets Rise on US Interest Rate Increase.

Last night the United States central bank, the Federal Reserve, increased interest rates by 0.25% per annum. Interest rates in the US have been frozen since 2006 and this now means that overnight rates where banks lend money to each other in the US will attract rates of between 0.25% and 0.5% per annum. These are still historically low rates.

For the last few weeks investment markets have been volatile rising and falling not just on speculation for interest rate rises in the US but also concerns for the slowing down of the Chinese economy.

Markets fell because many people thought that interest rate increases would slow down the US economy and thus global economies. However, on the back of these interest rate increases the US has also increased its forecasted economic growth rates meaning that they expect the economy to grow in spite of the increased cost of borrowing that will face US businesses. US stock markets rose by 1.28% yesterday and Canada rose by nearly 2% amid the interest rate increases.

Across the globe, the Shanghai stock exchange rose marginally, Japan rose by nearly 2%, Hong Kong by 2% and Europe rose by around 1.5% yesterday and another 0.5% to 1% today depending upon which European stock market you are tracking.

The dollar understandably strengthened against world currencies meaning that many developing nations will be able to export goods to the US more cheaply but countries that are competing for raw materials to produce goods such as China may face increased costs to buy raw materials if comparatively they are a little for the US to now buy. That said the dollar increase has also increased the general cost of raw materials and commodities such as oil and metals, those prices have risen, and as a result perhaps many nations may enter into a stable period of inflation now rather than the threat of deflation with falling oil prices.

Comment

The world is a crazy place. Markets fell as investors ‘priced in’ the impact of increased interest rates but when he increases actually came markets then rose. Was this the act chin of speculators and "short sellers" making a fast buck with markets being so volatile.

We also suggest that the increase in US interest rates will now apply pressure to the Bank of England to also increase interest rates as inflation looms and the position of the pound needs to be protected to provide stability in exchange rates so that our exports can continue to build.