Markets Fear Interest Rate Rise Sooner Than Expected

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Money markets are reacting to hints from the Fed and Bank of England that record low interest rates may start climbing earlier than expected.

Financial data has suggested rates were unlikely to change before the end of 2015, but the central banks may have other plans in mind.

The fuse was lit by Ben Bernanke, the US Federal Reserve boss last week, when he remarked that the Fed’s program of quantitative easing could end in 2014 if the US economy improved.

The Bank of England has also suggested interest rates might shift off 0.5%, where they have sat for the last four years, and inch up to 0.75%.

The percentage increase look insignificant, but represents an increase in business loan and home mortgage repayments if lenders follow suit, which they surely will.

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Good for savers

The Bank of England’s influential rate-setters, the monetary policy committee, have repeatedly turned down retiring governor Sir Mervyn King’s plea to boost the British economy with another £25 billion of quantitative easing.

Recently released committee meeting minutes show he had some colleagues have been voted down when asking for the extra cash for some months in a row.

Although good news for savers, who would see returns on deposits rise, stock markets around the world have reacted badly to Bernanke’s statement.

Money markets have already ratcheted up interest rates on financial institution fixed borrowing. Sterling five-year swaps have doubled since May – from 0.887% to 1.787%.

Stock markets fear rising interest rates could cripple global economic recovery by pushing the cost of borrowing beyond the grasp of many families and businesses.

Recession concerns

The knock-on effect could see a drop in consumer spending and less demand for manufacturers and service providers.

Companies would then need to look at cutting jobs and the delicately poised world economy could spiral back into recession.

One point to consider in Britain is a general election is expected no later than May 2015, and the government is unlikely to want to campaign against a background of rising interest rates and will work hard to maintain the status quo until after the result is known.

Also, the Bank of England is about to welcome a new governor in July 2013, Canadian Mark Carney, who has yet to make any policy statement about quantitative easing or interest rates. Bernanke is also due to stand down from the Fed in January 2014 in favour of a new incumbent.

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