US rate rise risks an ‘extraordinary shock’

AN interest rate rise in the United States would be ‘an extraordinary shock’ to the increasingly fragile global economy, according to experts.

The Organisation for Economic Cooperation and Development said the outlook for the world is worse now than it was just a few months ago amid fresh worries over China. The warning came ahead of a crunch meeting at the Federal Reserve where central bankers could tomorrow raise interest rates in the US for the first time in nearly a decade.

Larry Summers, the former US Treasury Secretary, urged the Fed not to act – adding that such a move ‘would be an extraordinary shock at a highly uncertain time’.

Financial markets around the world have been rocked in recent weeks by worries about the scale of the downturn in China and the prospect of higher rates in the US. The OECD said it is planning to trim its forecasts for global growth once again having already slashed the outlook for this year from 3.7pc to 3.1pc in June.

‘We are going to put out numbers with maybe a bit of a cut in terms of the outlook – and in some regions of the world a little bit more than a small cut,’ said Angel

Gurria, secretary general of the Parisbased watchdog. Analysts at Barclays cut their forecasts for growth in China from 6.8pc to 6.6pc for this year and from 6.6pc to 6pc for next year.

‘The downward revisions reflect the faster-than-earlier-expected slowdown in both property investment and manufacturing investment and continued headwinds to investment in 2016,’ the analysts wrote in a note to clients. ‘The stock market crash and rising [currency] depreciation expectations are also hurting investor and consumer confidence, adding downward pressure to growth in the coming quarters.’

Economic output in China rose by 7.4pc last year – its slowest pace in 24 years – and Beijing is now widely expected to miss its fullyear growth target of ‘around 7pc’ this year. Shares in China fell again yesterday, with the stock market in Shanghai down another 3.55pc, taking its losses since June to nearly 42pc. The Chinese government has slashed interest rates and intervened to devalue its currency and stabilise the stock market in an attempt to restore confidence and stimulate growth. But it has had little impact with the market rout spreading to emerging market currencies and commodities such as oil, copper and coal tumbling to multi-year lows.

The International Monetary Fund and World Bank have urged the Fed to put- off any plans to raise interest rates – warning such a move would wreak havoc on global markets. hung Tran, managing director at the Institute of International Finance, a global trade group for financial institutions, said a rate hike in the US ‘will add another dimension of stress to an already difficult situation’. It is thought a rate hike in the US could pave the way for higher rates in Britain in the coming months – although with

‘Downward revisions reflect slowdown’

official figures showing UK inflation fell back to zero last month there is little pressure on the Bank of England to act any time soon.

Ian Stewart, chief economist at Deloitte, said: ‘The Bank is under no pressure to hike rates. Low inflation is the Bank’s trump card in coping with the effects of weakness in China and choppy equity markets.’