The US Federal Reserve raised its benchmark interest rate Wednesday, by 50 basis points, as the most aggressive step to date in its battle against spikes in inflation. Several central banks in Arab countries have raised interest rates, including Saudi Arabia, the United Arab Emirates, Kuwait, Bahrain, Qatar, and Jordan.
The Central Bank of Egypt will meet on May 16 to discuss monetary policy, including raising interest rates.
The US Central Bank’s decision to fight high inflation, which hit 8.5% last March, was motivated by a lack of supply of goods due to supply chain problems, both due to Covid closures in China, both of the war in Ukraine and its impact on the prices of many materials prime basic, from food to energy.
Interest rates are one of central banks’ weapons to curb inflation by sucking up liquidity in excess from the economy and undermining demand.
However, the rise in interest rates by the United States means a lot to the direction of the movement of capital in Worldwide.
Your personal wallet
The decision of 5 Gulf countries, in addition to Jordan, to raise interest rates is expected to have a clear impact on its citizens’ personal portfolios and the expected start will be on the cost of new debt.
Therefore, your financing needs will currently be more onerous, in fixed-rate loans in particular, as they involve greater risks for the lenders of banks and financial companies, with the possibility of a new increase in interest rates.
Just like existing loans with variable interest rates, be it real estate loans or financing autothey too will see a raise and you should review your loans in these moments and contact the financial entity for your loans to find out the extent of the impact on yours budget personal.
Means floating rate loans (mobile): loans that are made up of two parts, one of which is fixed, which is the interest margin obtained by the lending bank and varies from bank to bank and in based on each customer and his creditworthiness, in in addition to a variable part, which is the official interest rate announced by the Central Bank.
Not only that, with higher interest rates, the cost of financing economic activities increases, and the economic feasibility of many projects decreases, as investors resort to investing their own money. in risk-free and fixed-return ships, with the uncertainty of the economic landscape and the presence of a higher income from banks, which can affect all economic activities.
In most cases, bank deposits increase significantly as interest rates rise, which can reduce the money supply and cause prices to fall again and thus inflation levels, depending on the speed of response to interest decisions.
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 – when valuing companies’ shares, as future cash flows of companies are discounted at a higher interest rate to calculate the present value of those funds, and therefore the higher the discount rate (synonymous with interest rate) the lower the present value of future cash flows and therefore the lower the the evaluation of the shares.
Many research centers and investment banks are expected to begin adjusting their recommendations and target values for the companies they cover.
Contrary to this picture, bank shares usually rise due to net interest income, which moves positively as interest rates rise.
determinants of interest
With the US Federal Reserve rising interest rates, many global central banks are forced to follow in its footsteps, as even if their recorded inflation rates are not high enough to raise interest rates, they may be forced to to make this decision is to maintain capital flows. Due to competition with the higher interest rates offered by US Treasury bills, or because its currency is directly linked to the dollar, and therefore the need to maintain exchange rates with the dollar, which should see a significant increase against many currencies.
The US dollar recorded its highest level since the global financial crisis last month, before retreating slightly after the decision to raise interest rates.However, the closest expectation is that dollar prices will rise relative to global currencies. , in particularly to emerging market currencies.
In turn, 5 Gulf central banks have announced an interest rate hike of 50 basis points, namely: Saudi Arabia, Kuwait, Bahrain, United Arab Emirates and Qatar, with their dollar-linked currencies, despite significantly inflation readings. lower than their counterparts in the United States.
Banks attributed their decisions to high global inflation rates and to avoid inflationary shocks to their economies imported from rising global commodity prices prime and energy.
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