US federal reserve chairwoman Janet Yellen announced the first interest rate hike in nine years on Wednesday in a move that was widely expected. Signalling confidence in the American economy’s slow rehabilitation since the 2008 financial crisis and dispelling fears over inflation, Ms Yellen ended an extraordinary period and started the process of returning the economy back to a normal state. While the rate hikes are expected to be gradual and modest, beginning with 0.25 per cent rise, they will have profound consequences far beyond America’s borders.
Speaking at the Fed’s October meeting, Ms Yellen admitted that she was well aware of the effects a rate hike will have on the global financial system. Now that the rate rise has been announced, there are several unavoidable conclusions and much speculation. We can expect to see borrowing costs go up. Money will flow to the US as investors are attracted to better returns on their investments. The dollar will probably continue to perform strongly against foreign currencies, increasing the cost of imports. This could affect dollar-traded oil in various markets such as China, which will add to a prolonged slump in oil prices.
Beyond the realm of economics, this decision could bring political developments to countries of importance for the UAE. Emerging markets like Turkey and South Africa have been taking advantage of the Fed’s very low interest rates to borrow significant amounts. This is coming to an end and we have already seen plunging Turkish lira and South African rand as a result of the strong dollar and fear about rate hikes.
Economic instability in these markets is creating pressure on political leaders and this uncertainty can have many unforeseen consequences for the region. And it is not confined to South Africa and Turkey: the pinch from Fed hikes will be felt across Brics economies and in Latin America and Asia.
Our economy remains robust thanks in part to the dirham’s dollar peg but the effects of the Fed’s recent decision will invariably impact us and maybe for the best. There will be opportunities in emerging markets as a result of this interest rate hike. The UAE’s central bank has also lifted CD rates in line with the Fed’s rate hike. One thing is for sure, the era of ultra cheap money is coming to a close. We will need to redraft some economic forecasts to cope and continue to seek out partnerships that are advantageous.
