Rise in US rates likely to boost equity markets

A US interest rate rise this week is likely to boost equity markets according to analysts. The US Federal Reserve is expected to increase interest rates by a quarter of a percentage point to 5.5 per cent at its meeting tomorrow.

According to Mr Colin Hunt, chief economist at Goodbody Stockbrokers, it will take the opportunity to complete its reversal of last year's emergency rate cuts which the Fed implemented as a reaction to the crisis in Russia and the Far East.

The US economy itself is still growing reasonably strongly and growth is still at a level that the Fed would consider to be unsustainable, according to Mr Hunt. However, inflation and wages inflation remain low.

The Fed is likely to push up interest rates, at least partly, because that is what the markets are expecting.

According to Mr Hunt, market sentiment would be damaged if the Fed failed to move rates to 5.5 per cent. As a result, conversely to normal reaction, equity markets are likely to rise following a rate increase and fall if there is no move.

But according to Ulster Bank senior economist Mr Eoin Fahy it is going to need some sort of an event to spur the Irish market. In his latest commentary, Mr Fahy points out that the Irish equity market has been held back by technical factors. The problem, he said, is that, with the advent of the euro, Irish asset managers are selling Irish shares and buying other euro zone shares instead.

As a result, according to Mr Fahy, it will take an "event" such as a bid for a bank such as Ulster that is larger than expected or some mergers or take-overs in telecommunications groups to spur the market.

The other possibility, according to Mr Fahy, is that share prices may fall so much that they become attractive for overseas buyer and then bounce back strongly.

This would also have to be accompanied by a further good performance of the Irish economy so that international investors would be persuaded that the economy is not a bubble.