US interest rates are likely to go up by 0.25% when the Federal Open Market Committee - the equivalent of the UK's Monetary Policy Committee - next meets on 29 and 30 June, predicts Axa Investment Managers.
The increase will be the first in a series that should see the key federal funds rate hit 4% a year from now, Axa adds – a substantial increase from the current 1% level.
Increasing rates is necessary because of building inflationary pressures.
Tax-cuts initiated by the Bush administration two years ago are feeding through to help the US economy move towards a 5% annualised rate of GDP growth.
Companies are starting to unfreeze their hiring policies, with the result Axa forecasts a 1.5% increase in the employment rate by the end of 2004 compared to the end of 2003. This will help offset the cost of providing tax cuts in the first place.
Prices in the US have been rising along with the cost of oil, although that issue seems to have been addressed by efforts to get OPEC member states to flood the market with additional output.
That leaves the issue of China and its effect on commodities prices.
Just today, chancellor Gordon Brown has stated that China is consuming half the world’s cement, a quarter of steel and a third of iron ore produced. Its growth is contributing more output to the global economy than all the G7 countries put together, Brown adds.
UK interest rates are widely tipped to go up by Thursday this week, when the MPC is expected to add another 25 basis points, 0.25%, to the cost of borrowing money, taking the base rate to 4.5%.IFAonline
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