World markets restless ahead of US interest rate meeting

Financial markets could suffer a fresh bout of nerves today ahead of Wednesday's meeting where the Federal Reserve Open Markets Committee will decide whether to raise US interest rates.

In addition, the Bank of England's Inflation Report and economic figures due this week will be scoured for clues as to how much further rates might climb in the UK.

Some believe recent financial turbulence around the world guarantees the Fed will postpone raising US interest rates. But others reckon there is still a chance of a rate rise this week on the back of evidence of growing inflationary pressure, with unemployment in America at its lowest for 25 years.

On this side of the Atlantic, last week's quarter-point rate rise will allow the Bank to forecast inflation staying on target. However, many economists believe the economy's momentum will force a further rate rise - some predict to as high as 8 per cent from today's 7.25 per cent.

There could be a market reaction to this week's figures on retail prices, factory gate prices, and earnings and unemployment.

The Bank of England's Quarterly Bulletin, published Wednesday, will argue that the pound's appreciation can be explained by the expectation of rising interest rates. This strengthens the case for down-playing the strong pound so as to justify not increasing the cost of borrowing any further.

The Bulletin article looks at past episodes of sudden changes in the exchange rate, including a jump last spring after the publication of figures showing a drop in unemployment and an increase in earnings growth.

In this case, a rise in the exchange rate now will be reversed later and is less likely to have much impact on the real economy.

The research also established that, in 1996, as the financial markets came to expect the single European currency to go ahead with many members, investors bid up the pound because the UK was seen as less likely to join.