US raises interest rates

24-08-2006

The US federal reserve has raised interest rates for the 17th consecutive time in a bid to halt rising inflation.

America's central bank raised its benchmark interest rate by a quarter of a percentage point to 5.25 per cent, its highest level since March 2001.

In a statement, the federal reserve said that the US economy appeared to be slowing following a strong performance last year, with the gradual cooling of the housing market and the impact of increased interest rates and energy prices beginning to have an effect.

But the bank's open market committee stressed that while the moderation in economic growth should help to ease price pressures, some inflation risks remained.

"Ongoing productivity gains have held down the rise in unit labour costs, and inflation expectations remain contained," said the federal reserve in its statement.

"However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures."

The central bank added that the "extent and timing of any additional firming that may be needed" would depend on future information relating to inflation and economic growth.

While the latest interest rate hike prompted fears of further increases among some analysts, other economists saw the statement as a sign that the federal reserve would slow future rises, with the moderate tone adopted by the central bank seen as markedly different to the stark warnings about inflation that it has alluded to over recent months.

US stocks rose following the news, reflecting a belief that the federal reserve's two-year credit-tightening policy could be slowing down.

The Dow Jones industrial index made its biggest one day gain in over a year, closing 217.24 points higher to 11,190.8, while the Nasdaq saw its highest rise in over two years, increasing by 62.5 points to 2.174.38.


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