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The US Federal Reserve raised interest rates by 25 basis points on July 26. According to Reuters, the rate hike marks the Fed’s 11th increase in its past 12 meetings, setting the benchmark overnight interest rate in the range of 5.25 percent to 5.5 percent, a level that has not been consistently surpassed since before the 2007 housing market crash.

In a press conference, US Federal Reserve Chairman Jerome Powell explained the challenges high inflation poses to the US economy, as well as its impact on people’s purchasing power and spending ability. As a result, the Federal Reserve is determined to bring inflation back down to its 2 percent target goal.

To pursue this objective, the Fed has raised the interest rate by a total of 525 basis points since March 2022.

It is evident that the rate hikes are targeting inflation, despite recent statistical data and indicators in the US indicating moderate economic expansion.

For instance, in June last year, the 12-month change in the Consumer Price Index was recorded at 3 percent. Additionally, the housing sector has shown some improvement, and the unemployment rate remains low at 3.6 percent.

It seems that the Fed’s attention is directed at stabilizing core inflation rather than headline inflation. This is because core inflation excludes the prices of food and energy, which are known to be highly volatile and subject to frequent substantial changes, while headline inflation takes into account the prices of all goods and services.

Although interest rate hikes can pose challenges to an economy and its financial sector, there are instances where a tight monetary policy is necessary to combat inflation and bring it back to more sustainable levels.

Finally, it seems that the Fed’s immediate focus is on stabilizing the Personal Consumption Expenditures price index, which is widely regarded as one of the primary measures of inflation. The Fed prefers to use the PCE price index in its assessments.

The Saudi Central Bank has responded to the Fed’s decision to raise the repurchase agreement (repo) rate by 25 basis points to 6 percent, as well as the reverse repurchase agreement (reverse repo) rate by 25 basis points to 5.5 percent. This move is driven by strategic economic and financial considerations.

This decision aligns with the bank’s objective of maintaining monetary stability. Additionally, several Gulf banks, including the Qatar Central Bank, Central Bank of Kuwait, and Central Bank of UAE, have also taken similar measures in response.

Although interest rate hikes can pose challenges to an economy and its financial sector, there are instances where a tight monetary policy is necessary to combat inflation and bring it back to more sustainable levels.

However, the challenge is to what extent the country’s economy and its financial sector can survive and bear the negative consequences.

I believe that a 2 percent as an acceptable inflation rate worldwide should be reconsidered to reflect the natural increase in raw materials and cost of labor over the years, as well as the global increase in the price of goods and services.

• Talat Zaki Hafiz is an economist and financial analyst. Twitter: @TalatHafiz

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