The tremors from the recent rate hikes by the Federal Reserve, though the move was to cool off high inflation that is running at a four-decade high in the United States, did not end with its borders. They were even felt on the world financial lives with higher borrowing costs, tumbling stock markets and depreciating currencies.
While the Fed raised its rate by a quarter-percentage point in March, the largest increase since 2000 came on Wednesday last, when it hiked its benchmark rate further by half a percentage.
The push marks the latest effort to contain spiking costs being felt by millions of households around the world. Many central banks followed suit. India's central bank last week announced a surprise increase to its benchmark rate, while Australia recently enacted its first interest rate hike in more than a decade.
Bank of England spooked markets by predicting that inflation could surge to 10 per cent and lifted the benchmark policy rates for the fourth straight time to a 13-year high of 1 per cent. The Reserve Bank of Australia, the Brazilian central bank and the Central Bank of Chile all raised their key rates.
In the Gulf region, the central banks of the UAE, Saudi Arabia, Bahrain, Kuwait and Qatar increased their benchmark interest rates by half a percentage point, its most aggressive decision in 22 years.
But what does rate hike mean and how it is affecting the emerging countries?
In every country, the central banks, as part of fostering economic prosperity and social welfare, control inflation by influencing interest rates. When inflation is too high, the banks raise the rates to slow the economy and bring inflation down.
When inflation is too low, the banks again typically lower interest rates to stimulate the economy and move inflation higher. The idea behind the rate hike is that, by making it more expensive to borrow, people will hold off on buying. This, on the other hand, could tame inflation.
The six-member economic bloc of the GCC, which has not been immune to this global trend, has of late become one of the leading economic issues on the minds of economists, policymakers, business and the general public at the moment.
Although there are some common themes in the factors driving inflation, there is also considerable divergence, if we look at the major components of the consumer price index. According to a PWC report, rent, food and transport comprise 57 per cent of the GCC’s overall consumption basket.
Surprisingly, food prices are only up by 3.0 per cent on average, only slightly above overall inflation. This is despite the region being heavily reliant on imports and global food inflation reaching the most in a decade.
The most direct way to limit inflation is to control prices. Subsidy regimes in the GCC held back inflation for many years, but many aspects of them have been withdrawn since 2016. The Sultanate of Oman has capped fuel prices at the November level and in January rejigged its electricity subsidy regime in a way that has reduced costs for most residential consumers, a disinflationary driver.
However, the inflation rate as per the consumer price index in the Sultanate of Oman increased by 3.6 per cent in March compared to the same month in 2021.
The consensus view across most global central banks, according to experts, is that lower interest rates can boost demand, by encouraging borrowing-to-spend behaviour by consumers and companies, thereby driving up prices, all else being equal.
With the Fed hinting as more increases are likely on the way, not only do the higher interest rates tap the brakes on the economies by making them more expensive to borrow, they also put downward pressure on prices of all kinds of investments.
Beyond interest rates and inflation, the war in Ukraine and the haunting fears of Covid-19 pandemic are also weighing on the world economy.
Oman Observer is now on the WhatsApp channel. Click here
