Third time not a charm?
The great big marble building on 20th Street and Constitution Avenue in Washington has served as a beacon of financial stability. When decisions emerge from the Federal Reserve’s Board of Governors meeting or from a Capitol Hill testimony the world watches and financial markets respond.
They did so this week with the quarter point cut in short and long term interest rates. It was the third move by the Fed in recent months, but the response was not positive either in U.S. financial markets or throughout the Middle East. In order to pack a “one-two punch” central banks stepped up with a $100 billion transatlantic coordinated effort to provide liquidity to commercial banks.
In the United Arab Emirates, the central bank followed the lead of the Federal Reserve and matched its short-term rate to the U.S. at 4.25 percent. Great, this means the growth machine in the Gulf continues? Not exactly. The central bank cut rates because of the link or peg to the U.S. dollar, which will put more pressure on inflation of better than 9 percent in the Emirates. This week inflation in Saudi Arabia hit a ten-year high, crossing 5 percent. Both are mild compared to Qatar, which is witnessing inflation in excess of 14 percent. A recent trip to Doha tells the story. Revenues from the gigantic North Field natural gas deposits are fuelling a sizable expansion in the emirate of less than a million people.
So as we wind down 2007 and prepare for our holiday of choice, what can we expect from the Federal Reserve, its counterparts in the Middle East and from emerging markets in 2008?
As we have witnessed in the past five years, the U.S. Central Bank is prepared to move, hence this Fed statement accompanying Tuesday’s decision: “Economic growth is slowing reflecting the intensification of the housing correction and some softening in business and consumer spending.” The door is certainly ajar for more action.
Last week on Marketplace Middle East we reported that the five remaining members of the Gulf Cooperation Council (Kuwait already de-pegged) were not prepared to remove their collective pegs to the U.S. currency. 2008 may provide a fresh impetus to rethink this strategy if -- and a big IF here -- regional and global growth outside the U.S. continues at this pace.
At its spring meetings in Washington, the International Monetary Fund predicted that global growth could tick along at a rate of 5 percent this year and next after posting growth of 5.4 percent in 2006. The fuel has been coming from India, China and the Middle East. The two emerging giants are growing between 8-10 percent and regional growth of 7 percent in the Middle East is nothing to sneeze at.
This will be a phenomenal test for the new East-East axis for trade, driving growth from the Middle East to East Asia. While Citigroup brought in Vikram Pandit as CEO, Wall Street was bracing for the next round of write-offs due to the credit crunch. On the other side of the mood barometer, the CEO of General Electric, Jeffrey Immelt, is pointing to strong global growth to drive 2008 profits, while saying he would not put a “happy face” on any division that is overly dependent on the U.S.
Which means what for our friends in the Middle East? Federal Reserve Chairman Ben Bernanke and his team in that great marble building probably have not finished cutting interest rates, and central bankers in the region may need to cut their ties to the U.S. dollar to help ward off inflation and to align with economies they are more in sync with.
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ABOUT THIS BLOGJohn Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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