Markets lifted by US interest rate hike

Central banks cheer end of uncertainty; greenback rises against most currencies

People watching share prices on a screen outside the Bombay Stock Exchange in Mumbai on Dec 17. PHOTO: AFP

The guessing game that has dominated markets for more than a year finally ended yesterday when the US raised interest rates for the first time in almost a decade.

The move to lift rates by 0.25 percentage point to 0.25-0.5 per cent is due to signs of recovery in the United States economy. Unemployment has fallen to 5 per cent and inflation is getting close to 2 per cent.

Reactions to something so widely anticipated were mixed: The price of gold continued slipping, but stock markets largely rose and central banks rejoiced that the uncertainty was finally over.

The Straits Times Index climbed 20.26 points, or 0.71 per cent. Tokyo rose 1.6 per cent and Shanghai gained 1.8 per cent. European markets also opened strongly, with London, Paris and Frankfurt gaining more than 1 per cent within minutes of trading.

As expected, the rate lift-off bolstered the US dollar against most currencies. The Singapore dollar weakened to $1.4168 to the greenback late last night.

United Overseas Bank economists noted: "A move above $1.42 will not be surprising, but it is premature to expect a sustained break above $1.4265."

But this is just the beginning.

The US Federal Reserve will likely move again next year, with indications that rates will be at 1.375 per cent by the end of 2016. That implies at least four more increases next year of about 0.25 percentage point each.

Fed chair Janet Yellen said on Wednesday night that it will be cautious as it "expects that economic conditions will evolve in a manner that will warrant only gradual increases" in the interest rate.

The benign investor reaction so far and the Fed's reassurance left economists optimistic that higher rates will not derail the world economy or financial markets. But emerging markets are on edge. Higher interest rates and weaker currencies against the greenback will hurt those paying off US-dollar debt amid slumping commodity prices.

International investors have already yanked billions out of markets in Asia, South America and Russia over the past year, and the fear is that the rate hike will trigger even more massive fund outflows - a concern Dr Yellen addressed on Wednesday.

"There can be negative spillovers through capital flows, but there are also positive spillovers from a strong US economy," she said.

"This action takes place in the context of a US economy that is doing well, and is a source of strength to the emerging markets and other economies around the globe."

OCBC economist Selena Ling noted that the rate hike spells a mixed bag for Singaporeans. "Companies may face higher refinancing costs, while the man on the street may face rising mortgage rates but, on the flip side, rising deposit rates and yields will benefit savers and investors."

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A version of this article appeared in the print edition of The Straits Times on December 18, 2015, with the headline Markets lifted by US interest rate hike. Subscribe