Greenspan hints at US rate rise

Alan Greenspan, the chairman of the Federal Reserve, today dropped the clearest hint yet that US interest rates will soon start rising from their historic lows.

The US central bank was "prepared to do what is required" to fight inflation, Mr Greenspan said, but expressed his confidence that the Fed would be able to take its time in tightening monetary policy.

The Fed has held key rates at a 44-year-low of 1% since last June but is widely expected to raise them by a quarter-point when it meets on June 29 to 30. Recent data showed that the US economy is starting to create jobs in earnest as strong growth finally feeds into the labour market. With the job growth at long last picking up steam, the Fed can now afford to rein in monetary policy.

In mid-morning trading in New York, the dollar rose 0.4% against the euro, at $1.2258, after Mr Greenspan made his remarks via satellite to a London banking conference. Earlier in the day the euro had touched a two-month high at $1.2351. A rise in US interest rates would make dollar-denominated assets more attractive, boosting demand for greenbacks.

While signalling that the period of easy money was over, Mr Greenspan was at pains to reassure the markets that monetary tightening would take place gradually.

"So far, we have no reason to believe that we will not be able to maintain a measured pace in the elimination of what we presume to be, at this stage, an unnecessary degree of accommodation," Mr Greenspan said.

Separately, the US treasury secretary, John Snow, said there was plenty of room for continued non-inflationary US growth, which has been booming in recent months.

On this side of the Atlantic, the Bank of England's monetary policy committee, which sets interest rates, begins a two-day meeting tomorrow, with analysts divided as to whether it will raise borrowing costs on Thursday.

Despite three rate rises since November, consumer spending has hardly flagged and the Halifax mortgage bank today reported a 2.2% jump in house prices in May. Continued strength in the property market and in consumer demand has led to speculation that the Bank will ditch its softly-softly approach of quarterly rate rises for a back-to-back move.

The Bank also has to take into account the surge in oil prices and how that feeds into inflation.

Mr Greenspan today described the rise of energy prices as a "worrisome element" that has been a net drain on the economy and could boost inflation if high prices persist.

"The recent modest declines in oil and natural gas prices may or may not signal a trend but are nonetheless welcome," Mr Greenspan said.