The global impact of the US interest rate rise

Kamal Ahmed
Business editor
@bbckamalon Twitter

image copyrightGetty Images

A quarter of one per cent.

It doesn't sound like much - but its significance is mighty.

After nearly a decade of what has been, essentially, a global economic effort - and experiment - to save the world from financial calamity, the Federal Reserve, the central bank to the world's largest economy, has decided, finally, to try a touch of "normalisation".

Getting economies "back to normal" was always the hope during that remarkable time when the financial system was in danger of going bust.

Central banks around the world slashed interest rates to near zero and created billions of pounds of support for governments and the wider economy.

I'm not sure anyone thought that, eight years on, we would still be in a near zero interest rate world. Or, in cases such as the eurozone, a negative interest rate world.

Fundamental damage

The financial crisis - a banking crisis which so damaged confidence and put the world in "risk-off" mode - more fundamentally damaged the global economy than many initially predicted.

Paying off debts - deleveraging - and not taking on more risk became the order of the day for governments that had over-borrowed and banks, businesses and consumers that had become drunk on easy credit.

Now the Federal Reserve has moved interest rates up a small notch.

The hike is a "doveish" one, with the Fed statement making it clear that any future increases will be "gradual".

Primarily, the rate rise is a signal about the strength of the US economy and shows that the chairwoman of the Fed, Janet Yellen, believes that the long march back to more normal economic conditions can begin.

Employment levels in America are high and growth is running at just over 2%.

Ms Yellen, a cautious governor, does not want to overdo it. She says the pace of growth in the US economy is "modest". And inflation is below target.

Global implications

When America stirs, the rest of the world takes notice.

Rising US interest rates could mean higher debt repayments for emerging market governments and businesses - as the amount owed is denominated in dollars.

And with higher interest rates in America, investment capital will be encouraged across the Atlantic and away from Asia in the hunt for better returns.

That could affect Europe as well.

On the upside, the stronger dollar which has followed the rise might be good for European and Asian economies as it means exports to America are cheaper.

UK interest

Could it increase pressure on Mark Carney, the Governor of the Bank of England, and his colleagues on the Monetary Policy Committee, to raise interest rates in Britain in 2016?

Many say yes.

The UK economy is strengthening, as is America.

The Bank insists the positive signs are not yet strong enough, but with employment rising and wage increases above the rate of inflation, a 2016 interest rate rise is certainly considered possible by many economists, including Sir Charlie Bean, the former deputy governor of the Bank of England.

Mr Carney has made it clear, in a way similar to the Federal Reserve, that when a rate rise comes it will be small and any subsequent increases will be gradual.

Homeowners with mortgages will need to factor in higher payments.

Savers who have seen years of very low interest rates are likely to heave a sigh of relief as, finally, the world starts approaching economic normality.