Gulf News - US Federal Reserve raises interest rate by another 0.75% - UAE responds with similar move

Dubai: The US Fed has decided to stick with a second successive 0.75 per cent hike rather than go with the 1 per cent that some had been expecting. The UAE has matched the US hike, raising its base lending rate by 0.75 per cent.

The rate hikes will continue to keep happening through the rest of the year as the US and global economies try to take on inflation. But consumers everywhere will be facing the issue of higher costs on loans and more as part of this painful inflation-busting exercise.

In the UAE, consumers with outstanding loans – whether for a car, home or personal needs – will have to start shelling out more on their EMIs, provided they are not on a fixed rate scheme currently. The UAE has typically matched US rate moves, given the dirham's dollar peg through the decades.

The next Fed rate hike will likely come about in September.

Kuwait move

Kuwait has become the first Gulf central bank to hike in unison with the US move, matching the 0.75 per cent. Saudi Arabia too has taken the same course, with the new lending rates coming into effect on July 28 for consumers and businesses.

US stock markets are running positive after the Fed announcement, while gold is at $1,734 an ounce and oil at $97.86 a barrel. US markets seem to factored in the latest rate increase – the Fed’s fourth this year – well, with the tech-laden Nasdaq inching its way to a 3 per cent gain and the S&P 500 up by 1.42 per cent in the 30 minutes after the Fed decision.

Qatar hikes in tandem

The Central Bank of Qatar has followed the US move, hiking its main deposit rate by 75 basis points (bps) to 3 per cent. The repo rate was raised by 75 bps to 3.25 per cent and lifted the lending rate by 50 bps to 3.75.

Bahrain too has followed suit, with the central bank confirming that rates will be higher by 0.75 per cent from tomorrow.

Will inflation be tamed?

The Fed is taking a whatever it takes attitude to putting the lid on inflation. So much so, market watchers are saying this comes with higher risks of global economy slipping into a recession, or worse, moving into stagflation.

According to Bal Krishen, Bal Kishen Rathore, CEO of Dubai-based Century Financial, “As US inflation soared 9.1 per cent in June 2022 from a year ago, above the 8.8 per cent estimate, it’s hard to ascertain how high interest rates might need to climb in order to get inflation back down.

"In the last 15 years, the Fed bumped up interest rates to the highest level in 2006 of 5.25 per cent, while the lowest was 0.00-0.25 per cent in 2008. The root cause for inflation to surge drastically in recent months was the expansionary monetary and fiscal policies during the pandemic. Fed’s rate hike stance is to cool the current aggregate demand in the economy."

How many more rate hikes?

US Federal Reserve chief Jerome Power had this to say in May: "Its a very difficult environment to try to give forward guidance 60, 90 days in advance. There are just so many things that can happen in the economy and around the world. So, you know, were leaving ourselves room to look at the data and make a decision as we get there..."

And what does this means for consumers? More costs to bear.