Fed raises interest rates

EMERGING MARKETS FACE PRESSURE TO RAISE RATES AMID TURMOIL

Officials reaffirm outlook for further gradual hikes well into 2019, risking fresh criticism from Trump |

US Federal Reserve officials yesterday raised interest rates for a third time this year and reaffirmed their outlook for further gradual hikes well into 2019, risking fresh criticism from President Donald Trump.

The quarter-point increase boosted the benchmark federal funds rate to a target range of 2 per cent to 2.25 per cent.

The move reflected an upbeat assessment of the economy that was identical to the central bank’s last policy statement eight weeks ago, despite concerns over Trump’s escalating trade war.

Economists were expecting the Fed to make a number of changes that reinforce a hawkish tone, including raising its growth and inflation forecasts, sounding more confident about the outlook and erasing the remains of policy accommodation.

Analysts say the unusual September rate hike would add to the market turbulence. George Goncalves, head of US rates strategy at Nomura, said in a note yesterday 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 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, the 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 a 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 October 4 policy meeting, with one economist calling for a 50-basis-point rise.

Most economists surveyed by Bloomberg predict a 25 basis-point increase in Indonesia, and a 50 basis-point hike in the Philippines this week.