Every FOMC meeting is important to traders and investors. It is the day when U.S. central bank policy makers meet and set up “interest rates & stimulus measures” This event has always been a market-moving one although for the past couple of months no actions were taken. In fact, the Federal Reserve was just twisting the language from a dovish one to more hawkish stance. This time it looks different and the odds of hiking in September is high.
We live in a different continent than the Fed and have different factors influencing our economy, but GCC won’t be happy with the news of a rate increase and probably it’s the wrong time. The simple reason is the GCC have their currencies pegged to the U.S. dollar, while only Kuwait pegs its currency to a basket of currency “Still dominated by U.S. Dollar”
Having a country’s currency pegged to another one, in theory it should also mirror the monetary policy of the counterpart central bank “Ïn this case we’re talking about the Fed” to keep controlling the currency rate, and this is what has been happening for the past couple of years. This is fine as long as economic conditions are similar, however, in recent years economic conditions in the GCC have moved out of Sync with the U.S. as revenues from oil halved with Brent Oil prices dropping from 110 to less than $50 in less than a year.
Although lower oil prices hit the GCC economies strongly, other factors also putting more pressure. Strength in the U.S. dollar against major developed and emerging currencies had huge impact on tourism and real estate investments. Prices in Dubai property markets dropped 12% since beginning of the year, investors from Europe, mainly Russia finding it difficult to invest as the Ruble depreciated by more than 30% since may. Hotels around the UAE are having a difficult time with low occupancy rate. What if the Dollar appreciated further? Definitely more headaches and the GCC should find a way to make monetary policies more flexible.
Why would you care if Fed started hiking rates?
The impact of one rate hike won’t be as hazardous, but a series of hikes could be painful.
If you’re looking to buy a home or refinance your property its better you do it at the earliest. With long-term U.S. bond yields likely to start going higher if Fed started the process or normalizing monetary policy. You will no more enjoy the same offers of low interest rates on Mortgage, and if you already have a mortgage, which is most probably of variable interest rate structure, get ready for higher monthly installment.
The same scenario goes for Car Loans, Personal Loans, and SME loans, which might lead to lower economic activity. However, there is a winner if the Fed started the process of hiking… They are the savers who will likely benefit of more returns on their deposits.