US Fed hikes interest rate by 25bps to curb inflation

WASHINGTON: In an expected move, America’s central bank Federal Reserve on Wednesday hiked interest rates by 25 basis points.

The Fed was earlier expected to raise rates by 50 basis points, but the banking crisis in the US appears to have prompted it to go slow to avoid a further meltdown. The central bank has committed to bringing down the inflation to 2 per cent from currently over 6 per cent.

In its statement, the Fed said recent indicators pointed to modest growth in spending and production, and job gains had picked up and were running at a robust pace. The unemployment rate has remained low and inflation remains elevated.

The majority of futures traders predict the Fed will increase its benchmark lending rate by 25 basis points to a range of 4.75-5.00 percent, according to CME Group.That would be in line with the size of the central bank´s previous rate hike in February, and mark the ninth increase since it began tightening monetary conditions last year.

Despite these efforts, price rises remained stuck well above the Fed´s long-term inflation target of two percent. The implosions of Silicon Valley Bank (SVB) and two other regional lenders pummeled banking stocks around the world last week, with Credit Suisse swallowed up by Swiss rival UBS after its shares sank to a record low.

Asian stock markets and most European indices rose ahead of the Fed´s decision on Wednesday. But British inflation rose unexpectedly last month despite a concerted effort by the Bank of England to tackle rising prices.

Wall Street stocks opened nearly flat on Wednesday as investors await the Fed´s decision. US regional banks opened lower before paring some losses. Embattled First Republic Bank was down around two percent 30 minutes into trading, while PacWest Bancorp was down nearly four percent.

The combination of hot US economic data at the start of the year and uncertainty in the banking sector has led most analysts to predict the Fed will continue with a more modest hiking cycle than was previously predicted.

“After the recent news, the recent developments in the financial markets, we now see a kind of risk to both sides,” Stephen Juneau, senior US economist at Bank of America Global Research, told AFP. “We´re still looking for a 25 basis point hike in March, May, and June,” he said.