US in­ter­est rates will rise much faster than ex­pected, warns Fitch

The Sunday Telegraph - Money & Business - - Business - By Tim Wal­lace

IN­TER­EST rates could shoot up much faster than ex­pected over the next 18 months, stun­ning mar­kets and de­liv­er­ing a sharp shock to bor­row­ers, credit rat­ings agency Fitch has warned.

The US Fed­eral Re­serve’s base rate could rise to 3.25pc by au­tumn next year, smash­ing through the 3pc mark at least a year be­fore the av­er­age Fed pol­i­cy­maker’s fore­cast.

Fitch’s fore­cast in­cludes four rate rises this year, dou­ble the pace of two which mar­kets cur­rently an­tic­i­pate. “Our im­pres­sion of the Fed is that it wants to get on with this, and the ra­tio­nale for leav­ing rates lower for longer has dis­ap­peared,” said James Mc­cor­mack, in charge of sov­er­eign rat­ings at the agency.

“It will take some­thing un­ex­pected to in­ter­rupt the path of higher in­ter­est rates. We are not an­tic­i­pat­ing that, so we think rates are go­ing to move higher than the mar­ket be­lieves they will.”

Very low un­em­ploy­ment and the con­tin­ued eas­ing of fi­nan­cial con­di­tions are likely to push the Fed in this di­rec­tion, he said. “At some point … the risk of do­ing too lit­tle be­comes greater than the risk of do­ing too much,” he added.

Fitch is­sues warn­ings to in­vestors when risks arise which could threaten bor­row­ers’ abil­ity to re­pay loans. Their fears over a steep rise in rates could have sig­nif­i­cant im­pli­ca­tions for cor­po­ra­tions and gov­ern­ments that are try­ing to raise more debt.

Mr Mc­cor­mack’s warn­ing comes af­ter the World Bank said fi­nan­cial mar­kets are the big­gest risk to the global econ­omy and that an un­ex­pected rise in rates could cause tur­moil in the years ahead.

Cit­i­group an­a­lysts also warned last week that tighter mone­tary pol­icy could stun global mar­kets.

Mr Mc­cor­mack does not think this set of rate rises will hit the econ­omy hard for now as the hikes to date have not fed through to sub­stan­tially in­creased bor­row­ing costs.

“It de­pends where mar­ket rates go and we have not really seen mar­ket rates re­spond,” he said, not­ing that US gov­ern­ment 10-year bond yields re­main low.

“That is what we will be watch­ing, the re­sponse from longer-term in­ter­est rates. If and when we see 10-year yields move higher, then the eco­nomic con­se­quences will be more sig­nif­i­cant.”

So far there are only hints of this tak­ing place. Two-year gov­ern­ment bond yields rose above 2pc on Fri­day for the first time since 2008 while 10-year yields have risen to 2.6pc.

This re­mains well be­low the level of bor­row­ing costs in the decade be­fore the fi­nan­cial cri­sis, how­ever, when the US gov­ern­ment typ­i­cally paid be­tween 4pc and 5pc to bor­row for 10 years.

As the US mar­ket is tra­di­tion­ally seen as the global risk-free bench­mark, other debts are priced against its yields.

This means that ris­ing rates in the US mar­ket could push up bor­row­ing costs across the rest of the world re­gard­less of other cen­tral banks’ ac­tions.

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