Rate hikes may suit US economy but other monetary authorities will face tricky dilemma

Source:Global Times Published: 2018/3/25 23:23:39

US rate hikes risk causing a global fallout. Gulf states, Hong Kong and other markets that peg their currency to the dollar worry that  following the Federal Reserve's tightening might endanger growth. But with five more hikes expected by the end of 2019, not doing so risks the ire of financial markets.

The Fed's rate-setting committee last Wednesday agreed to a quarter-percentage-point increase, its first under new Chairman Jerome Powell. Members penciled in another five hikes over the next 21 months, one more than expected during its previous meeting in December.

That may suit the US economy. But it puts greenback-linked economies elsewhere in a bind. If their central bankers or monetary authorities don't raise their rates, too, it'll offer traders an enticing bet: borrow money cheaply in the local denomination and invest the proceeds in higher-yielding American assets. If done in enough volume, this so-called carry trade would then push down the value of the affected currencies.

The Hong Kong dollar has already been falling lower as ample liquidity reduced borrowing costs and widened the gap between its and America's benchmark three-month interbank lending rate to 1.17 percentage points - the widest since the last recession, according to Thomson Reuters data.

The currency still trades within its band and the Hong Kong Monetary Authority says it will step in if it hits 7.85 to the US dollar. But concern about the impact on Hong Kong's red-hot property market - which makes up about 11 percent of GDP - lingers over any tightening.

The Gulf states are in a tougher spot. Low oil prices and austerity programs mean more rate hikes could seriously crimp growth.

With more US rate rises on the way, the mind games between monetary authorities and traders are sure to intensify. Saudi Arabia is a prime example. Speculation that the Monetary Authority might drag its heels widened the gap in lending rates with the US dollar. That in turn prompted the bank to pre-emptively raise rates.

Even China might be sucked into the game. Granted, the country doesn't have a peg, but often half-hikes with the Fed in order to limit outflows. Not for the first time, the US rate-and-currency strategy is set to become other people's problem.

The author is Christopher Beddor, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews. bizopinion@globaltimes.com.cn

Posted in: INSIDER'S EYE

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