Markets brace for sharpest rise in US interest rates in almost 30 years

The world’s financial markets are bracing themselves for the sharpest rise in US interest rates in almost 30 years, as America’s central bank takes action to halt rising inflation.

After days of frenzied investor speculation and signs of growing central bank anxiety, the Federal Reserve is expected to increase the official cost of borrowing by 0.75 percentage points for the first time since 1994.

The Fed meeting, with an interest rate announcement due at 7pm UK time on Wednesday, will be preceded by an emergency meeting of the European Central Bank (ECB) to discuss crashing bond prices in Italy, Spain, Portugal and Greece.

The Bank of England is expected to raise UK interest on Thursday, after the rise in UK inflation to a 40-year high. Despite some speculation of a 0.5 point increase, the City expects a 0.25 point rise to 1.25%.

The Fed’s chairman, Jerome Powell, had previously ruled out a 0.75 point increase but the central bank appears to have had a change of heart after higher than expected US inflation was announced last week.

Neil Wilson, an analyst at Markets.com, said of the ECB move: “Given there was a scheduled meeting last week, it smacks of panic and a lack of control, but the market is happy to see it happen. European bank shares rose and the euro also rallied, while Italian yields came back down.”

Andrew Kenningham, the chief Europe economist at Capital Economics, said: “News that the ECB governing council is holding an emergency meeting today shows that policymakers are taking the threat of rising peripheral yields more seriously than they were last Thursday at their regular policy meeting.”

The Fed statement and remarks by Powell at a press conference immediately afterwards will be scrutinised to see whether further sharp increases in US rates are likely. Some analysts think the central bank will raise them by 0.75 points again next month.

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