The central banks of the UAE, Saudi Arabia, Bahrain, Kuwait and Qatar increased their benchmark interest rates following the <a href="https://www.thenationalnews.com/business/economy/2022/05/04/us-federal-reserve-raises-interest-rates-by-50-basis-points/" target="_blank">US Federal Reserve's move to raise its key rate</a> by half a percentage point, its most aggressive decision in 22 years, as it tries to curb soaring inflation in the world's largest economy. The Fed's move is its second in less than three months as the US job market overheats and inflation reached 8.5 per cent in March, the highest level <a href="https://www.thenationalnews.com/business/economy/2022/04/12/us-consumer-prices-soar-in-march/">since 1981.</a> Most central banks in the six-member economic bloc of the GCC follow the Fed's moves on key interest rates due to their currency peg to the US dollar, with the exception of Kuwait, whose dinar is linked to a basket of currencies. The Saudi Central Bank raised its repurchase agreement (repo) rate by 0.5 of a percentage point to 1.75 per cent and the reverse repo rate by 0.5 per cent to 1.25 per cent, banking regulator Sama said in a <a href="https://www.sama.gov.sa/en-US/News/Pages/news-758.aspx" target="_blank">statement</a> on its website late on Wednesday<b>.</b> The <a href="https://www.thenationalnews.com/business/economy/2022/05/05/uae-raises-interest-rates-in-line-with-feds-biggest-move-in-two-decades/" target="_blank">Central Bank of the UAE also increased its base rate</a> for the overnight deposit facility (ODF) by half a percentage point. The CBUAE maintained the rate applicable to borrowing short-term liquidity from the regulator through all standing credit facilities at 50 basis points (bps) above the base rate, it said in a <a href="https://www.thenationalnews.com/business/economy/2022/05/04/uae-hikes-interest-rates-in-line-with-feds-biggest-move-in-two-decades/" target="_blank">statement</a> on Wednesday. The base rate, which is anchored to the Fed's interest on reserve balances (IORB), signals the general stance of the central bank's monetary policy and provides an effective interest rate floor for overnight money market rates. The <a href="https://www.cbk.gov.kw/en/cbk-news/announcements-and-press-releases/press-releases/2022/05/202205041216-cbk-raises-discount-rate-by-a-quarter-percentage-point" target="_blank">Central Bank of Kuwait (CBK)</a> also raised its discount rate by 25bps to 2 per cent from 1.75 per cent, effective from Thursday. The decision reflects the regulator's "vigilant monitoring of domestic and international economic and geopolitical developments that resulted in all-time high global inflation rates, mainly driven by increased commodity and energy prices and continuous supply chain disruptions, which constitute a key source of imported inflation", said CBK governor Basel Al-Haroon. The <a href="https://www.cbb.gov.bh/media-center/cbb-raises-key-interest-rate-3/" target="_blank">Central Bank of Bahrain</a> increased its key policy interest rate on the one-week deposit facility by 50bps to 1.75 per cent from 1.25 per cent. It also raised the overnight deposit rate to 1.5 per cent from 1 per cent, the four-week deposit rate to 2.5 per cent from 1.75 per cent and the lending rates to 3 per cent from 2.5 per cent. "Taking into account the evolving domestic and international macroeconomic developments", the <a href="http://www.qcb.gov.qa/English/News/Pages/4may2022.aspx" target="_blank">Qatar Central Bank</a> raised its repurchase rate by 50 bps to 1.75 per cent. It also increased its deposit rate by half a percentage point to 1.5 per cent and raised the lending rate by an equal amount to 2.75 per cent. On March 16, the Fed <a href="https://www.thenationalnews.com/business/economy/2022/03/16/us-fed-raises-rates-a-quarter-point-in-hopes-of-curbing-inflation/">approved</a> a quarter percentage point rise, its first since December 2018, after two years of keeping the rates near zero. The accommodative monetary policy to cushion the economy from pandemic shocks has pushed well above the Fed target of 2 per cent. US stocks rallied after Fed chairman Jerome Powell signalled he can slow inflation without triggering a recession. The Dow Jones Industrial Average gained 2.8 per cent, while the S&P 500 SPX increased 3 per cent and the Nasdaq Composite rose 3.2 per cent. "Wall Street still believes the Fed will be able to deliver a soft landing and that is good news for equities. The key takeaway from the Fed is that they are not ready to consider larger rate hikes [75 basis points]," said Edward Moya, a senior market analyst at Oanda. "It seems risky assets can rally now that Wall Street has fully priced in the rest of the year’s rate hikes by the Fed," Mr Moya said. The Fed’s hawkish stance to rate increases comes amid tumult in the global economy and energy and commodities markets volatility caused by Russia’s invasion of Ukraine. The<a href="https://www.thenationalnews.com/world/2022/02/18/russia-ukraine-latest-news/"> conflict </a>has upended commodity markets, altering global trade, production and consumption patterns that will keep food and energy prices at “historically high levels” until 2024, the <a href="https://www.thenationalnews.com/business/economy/2022/04/20/global-food-crisis-will-last-for-months-world-bank-chief-says/">World Bank </a>said last month. The <a href="https://www.thenationalnews.com/business/economy/2022/04/14/ukraine-war-to-lower-growth-forecast-of-143-countries-with-diverging-fortunes-imf-chief/">International Monetary Fund </a>also lowered its growth forecast for the <a href="https://www.thenationalnews.com/business/economy/2022/04/18/world-bank-cuts-global-growth-forecast-as-russia-ukraine-crisis-intensifies/">global economy </a>to 3.6 per cent in 2022 and 2023, revising it down 0.8 and 0.2 percentage points from its January forecast, respectively. The <a href="https://www.thenationalnews.com/business/economy/2022/04/19/imf-lowers-global-growth-projections-as-ukraine-russia-war-dents-economic-prospects/">IMF</a> expects inflation to hit 5.7 per cent in advanced economies and 8.7 per cent in emerging market and developing economies this year. Inflation in 2023 is projected at 2.5 per cent for advanced economies and 6.5 per cent for emerging markets and developing states. There is limited headroom for monetary policymakers around the globe, whose only recourse is to increase rates to curb inflation. “We expect that the Fed will follow in June with another 50 bps hike and at least 100 bps more hikes by the end of the year,” Emirates NBD said in a research note. “That will bring the Fed Funds rate at the end of 2022 to 2.5 per cent, up from our previous expectation of 2 per cent. In addition to higher rates, the Fed will also start to run down its balance sheet at a monthly pace of $95 billion, helping to tighten liquidity conditions further.” The Fed rate increases and matching moves by the UAE banking regulator will help <a href="https://www.thenationalnews.com/business/banking/2021/07/29/uae-central-bank-maintains-base-rate-at-15-basis-points-after-fed-holds-rates-steady/">UAE lenders</a> boost profitability, S&P Global Ratings said in February. “On average, banks in the UAE will benefit,” S&P said. “We calculate a 15 per cent increase in net income and 1.4 percentage-point rise in return on equity for every 100 basis points increase.” Their incomes will return to pre-pandemic <a href="https://www.thenationalnews.com/business/banking/2022/02/15/uae-banks-to-benefit-from-planned-interest-rates-increase-by-us-fed-sp-says/">levels</a> in the next 12 to 18 months on the back of stronger net interest income and increasing business momentum as the <a href="https://www.thenationalnews.com/business/economy/2022/02/18/uae-economic-recovery-gains-momentum-on-swift-action-and-policies-imf-says/">economy continues to rebound</a>, Moody’s Investors Service said in February.