Dubai: The US Federal reserve has gone in for a 0.75 per cent hike - and not the 0.50 per cent increase that was widely expected - in aggressive efforts to tamp down inflation. For the US, this is the biggest such increase since 1994. The Fed will go in for another rate increase next month - most likely by the same level - as bringing inflation down becomes the overriding priority.
The UAE central bank has matched the increase, with the new rates becoming efefctive from tomorrow (June 16), and this will add to the cost of loans for individuals and businesses. From a consumer and business perspective, it would require some deft handling to balance the cost of raising funds on one side and countering the headwinds of inflation on the other.
For UAE consumers, this will mean higher interest rate payouts on their loans and mortgages, especially for those who are doing so on a floating rate basis.
Bahrain's Central Bank immediately raised its rate in response to the US Fed move, with its key policy interest rate - on a one-week deposit facility - up 75 basis points to 2.5 per cent. The CBB also hiked by 75 bps the overnight deposit rate to 2.25 per cent, the four-week deposit rate to 3.25 per cent and the lending rate to 3.75 per cent. "The CBB continues to monitor global and local market developments closely in order to take any further necessary actions to maintain monetary and financial stability in the Kingdom," the bank said in a statement.
In Kuwait, the central bank hiked its discount rate by 25 basis points to 2.25 per cent, after the US Fed's 75 basis point rate hike. (The Kuwaiti dinar is pegged against a basket of currencies including the dollar.
Quick check on mortgage costs
Currently, mortgage rates in the UAE are typically fixed for the first two years (depending on the bank) at 3.99-4.25 per cent. Thereafter, they switch to a floating rate of Eibor (Emirates Interbank Offered Rate) plus a few percentage points.
The median rate ahead of the hike was at over 5 per cent. That's heading higher from tomorrow with the UAE Central Bank raising its base rate to match the Fed's.
Watch out for FX action
Currencies will likely see some heavy action in the hours ahead, while Asian markets will offer the first whiff of how investors have taken the US Fed action.
“Foreign selling of Southeast Asian stocks and other assets had (already) intensified (in recent days), weakening their currencies,” said Bal Kishan Rathore, CEO of Dubai-based Century Financial. “Another factor contributing to their decline is the weakening Chinese economic fundamentals, affecting the export potential of Southeast Asian countries.
“With US Fed hiking the rate aggressively, it is very much possible that the currencies of the region can fall more. The Japanese Yen is plummeting against the dollar due to Bank of Japan's stance of not increasing the interest rates. This will pressure Southeast Asian currencies to compete against Japan in electronics exports.”
Gold and oil
Gold prices shot up in the immediate aftermath of the announcement, now at $1,838 an ounce after spending nearly the whole of today in the $1,820 range. In the oil markets, Brent crude is down by over $3 to $117.8 a barrel.
Gold’s sudden rush would have come as a blow to UAE shoppers and jewellery retailers, who were expecting the exact opposite after the Fed decision. Now, they will have to wait to see whether the current gains will hold. Typically, dollar’s strength means a softer gold price.
How are the markets doing?
The US S&P 500 index is up 1.78 per cent, having started the day in positive territory and investors more or less factoring in the 0.75 per cent hike. When the Fed did make the announcement, the gains were extended. Will it mean a smart reversal or will the ‘bear’ spell continue awhile? Or will Asian markets opening Thursday provide a better barometer?
