Dubai: Global markets are anticipating a hike in US interest rates on Wednesday with the investors bracing for market volatility in stocks and asset prices and a domino effect on rates across emerging markets.
While analysts expect 25 basis point rate hike by the Federal Reserve with hints of further one or two more hike in rates this year. The third rate hike would take the Fed rates to 2.25 per cent. Economists expect the Fed to make a number of changes that reinforces a hawkish tone, including raising its growth and inflation forecasts, sounding more confident about the outlook and erasing of the remains of policy accommodation.
Analysts say the unusual September rate hike will add to the market turbulence. George Goncalves, head of US rates strategy at Nomura, said in a note on Wednesday that the rate hike would mark the first time that the Fed has tightened in September, a month in which the stock market historically has not performed well.
The dollar has benefited from a hawkish rate outlook all year. But in the last few weeks it has lost steam as other economies, such as the Eurozone, improved and signalled that it is edging to a tighter monetary policy.
End of cheap money
Economists say the new round of rate hike marks the end of accommodative central bank policies across the world, including the Eurozone. European Central Bank (ECB) President Mario Draghi said on Monday that the underlying inflation in the euro area is set to rise in coming months.
Although economists widely expect the ECB to hike interest rates only in the second half of next year, Euro rose sharply on Draghi’s comments as market interpreted them as hawkish.
With currency turmoil hitting many emerging markets earlier this year, analysts expect the hawkish tonne on interest rates to echo in the corridors of many EM central banks, particularly in Asia.
After Turkey and Russia raised rates earlier this month, the focus is on Indonesia India and the Philippines as emerging markets struggle to contain a rout in their currencies.
Most economists surveyed by Bloomberg predict a 25 basis-point increase in Indonesia, and a 50 basis-point hike in the Philippines this week. The currencies of both nations have slumped more than 8 per cent against the dollar this year.
Markets are anticipating a rate hike in India too. The rupee has been the worst performing currency in Asia this year with an year to date loss of more than 13 per cent against the dollar.
The Reserve Bank of India is likely to raise interest rates in early October, despite relatively tame inflation, to prop up a retreating rupee, according to a Reuters poll of economists. Slightly over half said RBI would deliver a 25-basis-point rise to 6.75 per cent at the 4 October policy meeting, with one economist calling for a 50-basis-point rise.
— With input from agencies