The US Federal Reserve on Wednesday raised its interest rates by 50 basis points in its continued efforts to fight inflation and indicated more are to come next year.
Wednesday's announcement does make good on indications the central bank would reduce the scale of its interest rate increases. But inflation is still at 7.1 per cent, well above the Fed's long-term goal of 2 per cent.
Fed Chairman Jerome Powell said the central bank would continue to raise rates next year. Monetary policy will need to be restrictive “for some time”, he added.
The median projected level of federal funds for the end of next year is 5.1 per cent, before dropping to 4.1 per cent in 2024. Mr Powell said the bank has forecasted rates to be reduced to 3.1 per cent by 2025.
“The [Federal Open Market] Committee expects that continued increases in the target range will be appropriate to attain a monetary policy stance that is sufficiently restrictive to return inflation to 2 per cent over time,” he told reporters during a news conference.
“We've covered a lot of ground and the full effects of our rapid tightening so far are yet to the felt.”
The S&P 500, Nasdaq Composite and Dow Jones Industrial Average slightly recovered during Mr Powell's remarks after tumbling following the Fed's announcement.
This is the seventh interest rate rise that the Fed has issued this year after rates were at near zero per cent in March. The latest announcement raises interest rates to the range of 4.25 and 4.50 per cent, the highest level in 15 years.
“Of course, 50 basis points is still a historically large increase, and we still have some ways to go,” Mr Powell said.
The Fed announced eye-watering raises after Mr Powell incorrectly predicted last year that the high level of inflation was “transitory”.
The six interest rate increases that the Fed has imposed this year have made borrowing costs higher for things such as credit cards and mortgages.
The Fed has seen some positive signs in recent weeks, however.
The US consumer price index, a day before the Fed's interest rate announcement, showed that inflation had eased to 7.1 per cent year-on-year, down from a summer peak of 9.1 per cent.
“It will take substantially more evidence to give confidence that inflation is going to sustain a downwards path,” Mr Powell said.
The resilience of the US labour market and wage growth continue to stymie the Fed's efforts to combat inflation — exacerbated even more by Russia's war in Ukraine.
The question in 2023 will be whether the Fed has been too aggressive with its interest rate increases. Mr Powell and his colleagues have sought to tamp down on inflation without driving the US into a recession.
With the holiday season in full-swing, Americans are beginning to feel the pain of everyday cost increases.
In addition to facing higher-than-usual costs on petrol, groceries and electricity, US consumers are also having difficulty purchasing gifts, an AP-NORC poll found. And of those people who are buying presents, 91 per cent are cutting back on their gift-giving.
Mr Powell said the Fed is “acutely aware” of the economic hardships facing Americans, in particular those on lower incomes.
BRIEF SCORES
England 353 and 313-8 dec
(B Stokes 112, A Cook 88; M Morkel 3-70, K Rabada 3-85)
(J Bairstow 63, T Westley 59, J Root 50; K Maharaj 3-50)
South Africa 175 and 252
(T Bavuma 52; T Roland-Jones 5-57, J Anderson 3-25)
(D Elgar 136; M Ali 4-45, T Roland-Jones 3-72)
Result: England won by 239 runs
England lead four-match series 2-1
UPI facts
More than 2.2 million Indian tourists arrived in UAE in 2023
More than 3.5 million Indians reside in UAE
Indian tourists can make purchases in UAE using rupee accounts in India through QR-code-based UPI real-time payment systems
Indian residents in UAE can use their non-resident NRO and NRE accounts held in Indian banks linked to a UAE mobile number for UPI transactions
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Ten tax points to be aware of in 2026
1. Domestic VAT refund amendments: request your refund within five years
If a business does not apply for the refund on time, they lose their credit.
2. E-invoicing in the UAE
Businesses should continue preparing for the implementation of e-invoicing in the UAE, with 2026 a preparation and transition period ahead of phased mandatory adoption.
3. More tax audits
Tax authorities are increasingly using data already available across multiple filings to identify audit risks.
4. More beneficial VAT and excise tax penalty regime
Tax disputes are expected to become more frequent and more structured, with clearer administrative objection and appeal processes. The UAE has adopted a new penalty regime for VAT and excise disputes, which now mirrors the penalty regime for corporate tax.
5. Greater emphasis on statutory audit
There is a greater need for the accuracy of financial statements. The International Financial Reporting Standards standards need to be strictly adhered to and, as a result, the quality of the audits will need to increase.
6. Further transfer pricing enforcement
Transfer pricing enforcement, which refers to the practice of establishing prices for internal transactions between related entities, is expected to broaden in scope. The UAE will shortly open the possibility to negotiate advance pricing agreements, or essentially rulings for transfer pricing purposes.
7. Limited time periods for audits
Recent amendments also introduce a default five-year limitation period for tax audits and assessments, subject to specific statutory exceptions. While the standard audit and assessment period is five years, this may be extended to up to 15 years in cases involving fraud or tax evasion.
8. Pillar 2 implementation
Many multinational groups will begin to feel the practical effect of the Domestic Minimum Top-Up Tax (DMTT), the UAE's implementation of the OECD’s global minimum tax under Pillar 2. While the rules apply for financial years starting on or after January 1, 2025, it is 2026 that marks the transition to an operational phase.
9. Reduced compliance obligations for imported goods and services
Businesses that apply the reverse-charge mechanism for VAT purposes in the UAE may benefit from reduced compliance obligations.
10. Substance and CbC reporting focus
Tax authorities are expected to continue strengthening the enforcement of economic substance and Country-by-Country (CbC) reporting frameworks. In the UAE, these regimes are increasingly being used as risk-assessment tools, providing tax authorities with a comprehensive view of multinational groups’ global footprints and enabling them to assess whether profits are aligned with real economic activity.
Contributed by Thomas Vanhee and Hend Rashwan, Aurifer
