US Fed raises rates by 75 basis points, dollar gets stronger

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The US Federal Reserve raised their main interest rate by 75 basis points, the biggest increase since 1994. The rise, the third since March, comes after inflation in the US surged to a four decade high of 8.6 per cent. It is expected that other Central Bank’s around the globe may also follow similar steps of raising rates.

Fed Chair Jerome Powell hinted that another rate hike of similar magnitude may take place in July. The US Dollar Currency Index, which tracks the greenback against six major currencies, was up 0.35 per cent at 105.66. It has to be noted that Fed raised rates by 0.5 per cent last month, which was the largest rate hike since 2000.

The war in Ukraine and the continuing disruption to global trade caused by the coronavirus pandemic have both contributed to rising prices for food and energy, resulting in central banks raising rates to control inflation.  

Since August last year, Central Bank of Sri Lanka (CBSL) has raised policy rates by 900 basis points, which includes a 700 basis point increase in April 2022.

Headline inflation, as measured by the year-on-year (Y-o-Y) change in the Colombo Consumer Price Index increased to 39.1 per cent in May 2022 from 29.8 per cent in April 2022.

In a mid May press conference, CBSL Governor Nandalal Weerasinghe stated, “Headline inflation may increase to 40 per cent in the near term; however that does not mean that we have raise rates to that extent. The high inflation is due to one off price increases, which may come down after few months.”

Speaking to Ceylon Today, First Capital Head of Research Dimantha Mathew noted that global funds may shift towards US since AAA risk free rates are moving up and becoming attractive.

It is worth to note that one of the reason for 1997 South East Asian Financial Crises was Fed rate hikes, which took the funds away from the region to US.

By Rajiesh Seetharam