US Federal Reserve raised prime rate Wednesday, by 50 basis points, as the most aggressive move yet in its battle once morest inflation spikes. A number of central banks in Arab countries raised interest rates, including Saudi Arabia, the UAE, Kuwait, Bahrain, Qatar and Jordan.
The Central Bank of Egypt is scheduled to meet on May 16 to discuss monetary policy, including raising interest rates.
The US Central Bank’s decision to fight high inflation, which recorded 8.5% last March, was prompted by the lack of supply of goods due to supply chain problems, whether as a result of the Covid closures in China, or the Ukrainian war and its impact on the prices of many basic commodities from food to energy.
Interest rates are one of the central banks’ weapons in curbing inflation, by sucking excess liquidity out of the economy and undermining demand.
However, the US raising interest rates means a lot to the direction of the movement of capital around the world.
Your personal wallet
It is expected that the decision of 5 Gulf countries, in addition to Jordan, to raise interest rates, will have a clear impact on the personal portfolio of its citizens, and the expected start will be on the cost of new borrowing.
Therefore, your financing needs will be more expensive at the present time, especially loans with fixed interest, as they carry higher risks for financiers from banks and finance companies, with the possibility of a new increase in interest rates.
Just as the existing loans with variable interest rates, whether it is real estate loans or car financing, they will also witness an increase, and you should review your loans at these times and contact the financing entity for your loans to find out the size of the impact on your personal budget.
It means loans with variable (moving) interest: loans that consist of two parts, one of which is fixed, which is the interest margin obtained by the financing bank and varies from one bank to another and according to each customer and his creditworthiness, in addition to a variable part, which is the official interest rate announced by the Central Bank.
general activity
Not only that, with higher interest rates, the cost of financing economic activities becomes higher, and the economic feasibility of many projects decreases, as investors resort to investing their money in risk-free and fixed-return vessels, with the uncertainty of the economic landscape and the presence of a higher return from banks, which may It affects all economic activities.
In most cases, bank deposits rise significantly with the rise in interest rates, which may reduce the money supply and lead prices to fall once more and thus inflation levels, depending on the speed of response to interest decisions.
Most of the Gulf stocks fell as investor sentiment declined
stock valuations
On the other hand, many analysts rely on what is known as the “risk-free rate of return” – or the interest rate on treasury bills and bonds – in evaluating companies’ shares, as the future cash flows of companies are discounted at a higher interest rate to calculate the present value of those funds, and thus The higher the discount rate (synonymous with interest rate) the lower the present value of the future cash flows and therefore the lower the valuation of the shares.
It is expected that many research centers and investment banks will start adjusting their recommendations and target values for the companies they cover.
Contrary to this picture, bank shares usually witness a rise due to the net interest margin, which moves positively with the rise in interest rates.
determinants of interest
With the US Federal Reserve raising interest rates, many global central banks are forced to follow in his footsteps, as even if their recorded inflation rates are not high enough to raise interest rates, they may be forced to make this decision either to maintain capital flows coming to them. As a result of competition with higher interest rates offered by US Treasury bonds, or because its currency is directly linked to the dollar, and thus the need to maintain exchange rates with the dollar, which is expected to witness a significant increase compared to many currencies.
The US dollar recorded its highest level since the global financial crisis last month, before retreating slightly following the decision to raise interest rates. However, the closest expectation is that the dollar prices will rise once morest global currencies, especially emerging market currencies.
Gulf countries
In turn, 5 Gulf central banks announced raising interest rates by 50 basis points, namely: Saudi Arabia, Kuwait, Bahrain, the United Arab Emirates and Qatar, with their currencies linked to the dollar, despite inflation readings that were significantly lower than their counterparts in the United States.
The banks attributed their decisions to the high rates of global inflation, and to spare their economies imported inflationary shocks from the rise in global commodity and energy prices.
