For a fourth time this year, the US Federal Reserve increased interest rates by 0.75 per cent to 4 per cent - the highest in 13 years and which will directly affect economic activity across all countries considering the scale of the American economy and the function of the US dollar.
By increasing the interest rate, the Fed seeks to curb the rise in US inflation, which is at the highest rate in 40 years. Many central banks, including those in the Gulf, increased their interest rates by the same percentage. This will likely have an effect slightly different from those in the US, where the dollar appreciated against other currencies while US stocks declined significantly and inflation levels remained almost unchanged.
Oil prices remain in tight range
As is always the case, the rising value of the dollar caused a drop in oil prices, though this did not last long and jumped back to $98 per barrel. Oil prices are also influenced by other no less important factors, such as economic growth, particularly in China, which is one of the biggest oil consumers. Furthermore, there were some signs that the Chinese economy may be overcoming some of COVID-19 restrictions and which might lead to a rise in oil consumption.
The Gulf financial markets' response to the recent hike, however, was less severe than those at US and European peers, by dropping at a slower rate and brought on by the continued high price of oil. Expectations suggest that the Fed will keep raising interest rates. After the recent increase, Fed chair Jerome Powell stated "more hikes are still needed", adding that "it is too early to think about stopping the increases designed to reduce inflation".
The Fed will probably increase in December, though probably at a lower rate, which will have new effects on the global economy and currencies, for which we must be ready. The target was set at 5.6 per cent, which is quite high, especially for nations like the GCC that have not experienced significant levels of inflation to date. However, because of the high financing costs brought on by high interest rates, this may result in a drop in financing for key economic sectors.
Need for a balance
Thus, the GCC will have to deal with crafting fiscal and monetary measures that allow for a compromise between higher interest rates and the demands of internal economic circumstances.
This should be taken into account to maintain the continuous growth momentum in the GCC, which boast one of the highest GDP gains in the world. Even if difficult to do, it is essential to take action to minimize the effect of rising interest rates and achieve the required balance between Gulf economies, particularly given that this also coincides with more IPOs. Any decline in market indicators brought on by high interest rates needs to be limited, as there are financial and economic instruments that can help attain the needed balance.