Credible, and quite credible Asian pegs raise policy rates after Fed hike

ECONOMYNEXT – Asian and West Asian credible and quite credible pegs have raised their policy rates in the wake of a 25 basis point hike in the policy rate by the Federal Reserve, whose currency the US dollar, is used as an external anchor for inflation control. The US Fed raised its target fed fund rate by 25 basis points to between 1.75 to 2.00 percent. The Federal Reserve will buy third party government securities from banks and dealers with newly created (printed) money to keep overnight rates from going above the 2.0 percent. The UAE central bank, whose currency the Dirham underpins the Dubai International Financial Centre raised the rate at which it provides money by 25 basis points 2.25 percent. The money is provided against its own certificates of deposit (a type of central bank security). Bahrain also raised is rate to 2.25 percent. The Saudi Arabian Monetary Authority raised its liquidity rate to 2.5 percent and the deposit rate to 2.0 percent. Kuwait which already had a 3.0 percent rate said it would not make a change. The pegs have a high degree of credibility, but are not true fixed exchange rates (currency boards) Hong Kong Monetary Authority, a currency board with a credible peg, which does not have a true policy rate said it was raising its overnight ‘base rate’ to 2.25 percent. Because the currency is fixed, (the HKMA makes unsterilized interventions) the policy rate has to float. The base rate is set at 50 basis points above the lower end of the prevailing target range for the US federal funds rate or the average of the five-day moving averages of the overnight and one-month Hong Kong Interbank Offered Rates (HIBORs), whichever is the higher. Hong Kong, which has a strong banking system due to the lack of a true discount window is facing a property bubble due to prolonged low interest rates from the Fed. Countries like Malaysia that have dirty floats have weakened. (Colombo/June18/2018)

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