Interest rate hike: What you need to know

Interest rate hike: What you need to know
Interest rate hike: What you need to know

Stocks soared Tuesday ahead of a long-expected hike in interest rates by the Federal Reserve.

Stock markets climbed as investors prepared to welcome an expected rise in US interest rates – seven years after they were slashed to near-zero during the financial crisis.

The FTSE 100 Index was ahead by 70 points during the session with similar increases seen on Germany’s Dax and France’s Cac 40.

Traders were taking the positives from the widely-anticipated decision by the US Federal Reserve amid hopes it will bring calm to markets and signal that the world’s biggest economy is back on track.

Surging jobs figures and signs that underlying inflation is creeping back up all appear to suggest the US is ready to wean itself off the financial life support provided by the US Federal Reserve during the recession.

The decision by the Fed will also have global repercussions although it looks unlikely to prompt the Bank of England to follow suit soon as new labour market data showed UK pay growth slowing.

Fed chair Janet Yellen said earlier this month that she was “looking forward” to a hike – which would be the first increase since June 2006 – saying it would be a testament to how far the US economy has come since the downturn.

In the UK, rates have been on hold at the historic low of 0.5% since 2009. But in an interview with the Financial Times, Bank of England governor Mark Carney appeared to play down the prospect of a hike on this side of the Atlantic.

Mr Carney had said in a speech earlier this year that the timing of a UK hike would come into “sharper relief” around the turn of the year amid the economic recovery on this side of the Atlantic.

But in his FT interview he said the conditions for raising rates had not been fulfilled, despite the recovery continuing – with inflation remaining close to zero.

“In terms of overall growth, it’s been there, but in terms of the cost developments, it hasn’t been,” Mr Carney told the newspaper.

A Fed move will have repercussions across the globe, including in emerging markets where there are fears that starting to turn off the flow of cheap dollars from the US will hurt investment.

Stock markets have seen a turbulent start to December in the run-up to the expected move, with shares hit by weakening commodity and oil prices, against the backdrop of slowing growth in China.

There may be anxiety that a Fed hike could compound the gloomy global picture. But there have also been signs that markets are ready to swallow an increase and that a failure to act could be seen as a signal of concern over the health of the US economy.

On the eve of the Fed decision, the FTSE 100 Index fought back from recent falls to post its strongest one-day rise since the start of October, adding £37bn to the value of its constituent companies. Markets in the US and Europe were also ahead strongly.

The rally continued today, led by electricals to mobile retailer Dixons Carphone, after it reported a 23% rise in first half profits.

Sportact Editors and Wire Services