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The world is walking a tightrope

Jun 23,2022 - Last updated at Jun 23,2022

After the US Federal Reserve (Fed) raised the Fed funds rate by seventy-five basis points, the upward trend of interest rates in global markets was confirmed, at a time when there is a discrepancy in the performance of economic indicators in various countries;  Some of them agree with this upward trend, and others do not.  Hence, the world sees that the decision makers at the Federal Reserve are walking a tightrope, in a state of constant vigilance, in an attempt to reduce inflation levels from the highest levels it reached in several decades, without pushing the American economy into recession.

 According to the latest data updates, overall economic activity in the US appears to have rebounded after declining in the first quarter.  Job gains have been solid in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures. This is what prompted the Fed to raise interest rates significantly and repeatedly for the first time since 1994. Will the Fed achieve its goal of raising interest rates and reducing consumer demand for goods and services?

 What is interesting and surprising is that the financial markets witnessed an improvement in the next day, reversing their normal behaviour when raising interest rates. This has left observers baffled. As for consumer demand for goods and services, there is usually a time gap between raising interest rates and consumers slowing down their spending, so let’s wait and see what happens.

 Some are concerned that large increases in interest rates by the Fed will not help reduce inflation, especially since the rise in prices is due to higher costs on the supply side, not a rise in demand.

 Central banks in the MENA region quickly raised their interest rates, but to varying degrees. For example, the Central Bank of Kuwait raised the interest rate by 25 basis points to 2.25 per cent, and the Saudi Central Bank decided to raise the rate of repurchase agreements (repo) by 50 basis points to 2.25 per cent, and also raised the rate of reverse repurchase agreements (reverse repo) by 50 basis points to 1.75 per cent.  Bahrain’s central bank raised the overnight deposit rate by 75 basis points to 2.25 per cent.  Qatar Central Bank raised the bank’s interest rate for deposits by 75 basis points to 2.25 per cent, in addition to raising the interest rate for borrowing from the bank by 50 basis points to 3.25 per cent, and raising the repurchase rate by 75 basis points to become 2.50 per cent.  The United Arab Emirates ‘ Central Bank raised the interest rate on the overnight deposit facility by 75 basis points.

 In Jordan, the Open Market Operations Committee of the Central Bank of Jordan decided to raise interest rates by 50 basis points on all monetary policy instruments, except for the overnight deposit window interest rate, which was raised by 75 basis points.

 There is no doubt that fears of the possibility of the global economy entering a state of stagflation are increasing.  What are the other means available to curb inflation?!

 The fear of entering a phase of an inflationary stagnation comes at the time of this stagnation, if it occurs in the United States, due to the fact that the American economy has begun to recover from the consequences of the Corona pandemic with an unprecedented drop in unemployment rates, as the economy has reached a state close to full employment.  The situation in many countries of the region is going through an opposite situation, and their economies need to have low interest rates to stimulate demand for credit, stimulate the economy and create job opportunities.

 There is no doubt that other alternatives to fight inflation are available, foremost among which is resorting to other alternatives to energy sources from oil and gas, such as solar energy, wind energy and oil shale.  Innovations can find alternatives for consumer goods, and a good example can be talked about replacing cooking with oils by resorting to an air fryer that does not need any type of oil when using it, and this means addressing the global supply scarcity in the oil sector, and so on.

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