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Thursday, September 22, 2022

Gulf News - US Fed sticks with another 0.75% rate hike - UAE, Saudi, Qatar central banks raise too

By Century Financial in Century in News

Gulf News - US Fed sticks with another 0.75%...
Bal Krishen Rathore, Special to Gulf News September 22, 2022

Dubai: The US Federal Reserve has raised interest rates by another 0.75 per cent, with Gulf central banks announcing their own hikes. In the UAE, the base rate will see an immediate 0.75 per cent increase after the Central Bank confirmed it would mirror the US move.

The Saudi, Qatar and Bahrain central banks have also confirmed similar increases with immediate effect.

The US Fed again chose to go for a three-quarter hike than by a full 1 per cent, as it tries to tackle inflation at all costs. This is the fifth increase that the Fed has effected this year, and the first since July. All of the past hikes were matched by the UAE Central Bank.

According to Fawad Tariq Khan, Group CEO of Dubai-based Shuaa Capital, “We are actively advising companies to manage their cost of capital through different structures such as non-bank debt or structured equity while focusing on true operating performance.”

As for consumers and businesses in the Gulf, there's some partial cheer - in that the Fed did not think fit to increase by 1 per cent. That, if it had happened, would have truly pinched when it comes to the extra costs they would have had to bear.

US markets drop, gain and then slide

The US stocks are currently in the red after the hike announcement. The slump in US stocks is the first such after the recent round of rate hikes, with the Fed chief Jerome Powell confirming there could be more bad tidings for the economy. (The Dow has since reversed direction and is up 119 points at 11.00 GST.)

But the upward mobility was short-lived, the Dow went on to lose more than 550 points by the close as investors weighed in on the full impact of the Fed's hawkishness on inflation control at any cost.

Gold gains

Gold prices have inched up marginally to $1,669 an ounce. (The overnight Dubai Gold Rate is still at Dh190.25 a gram for 22K, the lowest for the year.)

Bahrain became the first Gulf bank to announce a hike following the US move, raising overnight rates by 0.75 per cent. Qatar followed with an identical increase soon after.

Kuwait, too, issued its own rate increase, but by 0.25 per cent. This takes its overnight lending rates to 3 per cent. (Kuwait unlike its Gulf counterparts, pegs its dinar to a currency basket rather than to the dollar alone.)

UAE, Gulf consumers need to budget

Everything from credit card bills to property mortgages will be in for another round of change, which will leave consumers a lot of planning to do to adjust to the series of increases and what this means on their payments commitments.

The current round of US rate increases takes consumers back to 2007-08 times. "Before the onset of the 2008 global financial crisis, interest rates in the US had been around 5-5.25 per cent," said Bal Krishen Rathore, CEO of Century Financial in Dubai. "This target was achieved by the then Federal Reserve Chairman Ben Bernanke who raised interest rates gradually by 50 bps or 75 bps over a span of two years to keep a lid on inflation.

"However, now the scenario is completely different where at the start of 2022, the interest rate was 25 bps and the year-end target rate is around 4-4.25 per cent. A steep rise in interest rates demonstrates Fed’s aggressive stance to bring inflation to its 2 per cent target.

That's the scenario UAE and Gulf consumers are confronting. So far, for Dubai and the UAE property markets, this has not led to any slowdown in demand patterns. But developers wanting to target end-user buyers will need some working on their incentives. Some projects are starting to offer ‘discounts’ and brought down upfront payments on bookings.

What's next for markets and investors?

Under no circumstances should investors press the panic button - that's the message from Nigel Green of deVere Group, the UK consultancy. "Investors should avoid complacency, but similarly, they should avoid panicking and responding to market reaction that is being driven by imperfect Fed policy tools," said Green. "Whatever is announced by the Fed – which is guilty of grand scale inaction early on in tempering red-hot inflation – should be considered, but not given precedence over basic investment truisms.

“Investors should look to allocate cash to risk assets – thereby following the adage ‘to buy when others are fearful’ - while remaining well diversified by asset type as well as sector and geography.”

In short, something that will hold until the next Fed hike...

Gulf News