Interest rates on knife edge as US slows

A DRAMATIC slowdown in the American economy has sparked a fresh debate over when interest rates will rise on both sides of the Atlantic.

official figures published in Washington DC showed output in the United States rose at an annual rate of just 1.5pc in the third quarter of the year – down from 3.9pc in the second quarter.

The report will be pored over by officials at the Federal reserve as they close in on the first interest rate rise for nearly a decade.

The Fed held rates at historic lows of between zero and 0.25pc on Wednesday night but signalled there could be a hike at its next meeting in December. Analysts believe that could pave the way for a rate rise in the UK next year.

Liz Martins, an economist at HSBC in London, said the Bank of England may need to raise interest rates before the Fed but added it may be reluctant to do so. ‘Strategically, it may not move without this comfort blanket,’ she added.

An annual growth rate in the US of 1.5pc is the equivalent of just under 0.4pc on the quarterly measure favoured in Europe.

The British economy grew by 0.5pc in the third quarter of the year, meaning it is once again outperforming the US, having been the fastest-growing economy in the G7 in both 2013 and 2014.

The slowdown in the US was partly due to companies running down stockpiles of goods but domestic demand was solid with consumer spending up 3.2pc.

‘Growth is still strong enough to handle interest rates not being at emergency low levels any more,’ said Jennifer Lee, a senior economist at BMo Capital Markets.

Paul Ashworth, chief US economist at Capital Economics, said upcoming jobs and inflation figures would determine whether the Fed raises rates in December or early next year.

‘We still think the Fed will end up delaying until 2016,’ he said.