Hong Kong, GCC pegs, Vietnam hike rates after Fed as Sri Lanka eyes flexible policy

- economynext.com

ECONOMYNEXT – The Monetary Authority of Hong Kong, an orthodox currency board and currency- board-like UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman as well as Vietnam raised rates in tandem as the US Federal Reserve hiked rates as Sri Lanka eyes a new law with more flexible policy.

The US Fed hiked its target rate to 3.0 – 3.25 percent and the interest on reserve balances (earlier called excess reserves) to 3.15 percent.

The Hong Kong Monetary Authority, a near-orthodox currency board, raised its base rate to 3.50 percent or 50 basis points above the lower Fed target rate or a the five day moving average of overnight and one month rate Hong Kong interbank offered rate, whichever is higher.

UAE, which has a currency-board-like arrangement along with several other Gulf Co-operation Council nations, raised its overnight deposit rate to 3.15 percent from 2.4 and the lending rate to 50 basis points above the IORB rate.

The Saudi Central Bank hiked cash injection rate by 75 basis points to 3.75 percent and excess cash deposit rate by 75 bp to 3.25 percent.

Kuwait said it is raising its rate by 25 bps to 3 per cent. Qatar Central Bank has raised its deposit rate by 75 bps to 3.75 per cent as.

Bahrain raised its overnight deposit rate from 3.00 to 3.75 per cent, the four-week deposit rate from 4 to 4.75 per cent and the lending rates from 4.50 to 5.25 per cent. Bahrain raised policy interest rate one one-week deposit facility from 3.25 to 4 percent.

Oman also raised its policy rate to 3.75 percent.

Vietnam, which has kept its peg around 22,000- 23000 dong to the US dollar for around 12 years following its last currency crisis in 2011 following ‘stimulus’ debacle when the Greenspan-Bernanke bubble hike rates by 100 basis points.

The hike took the overnight liquidity auction rate, which fluctuates on liquidity conditions to a ceiling 6.0 percent. Another discount and re-discount rate was raised to 5.0 and 3.5 percent. The Vietnam dong has slipped about 200 to 300 dong in the past few weeks.

State Bank of Vietnam has promised US Treasury Secretary Janet Yellen, a former Fed Chief that it will not depreciate its currency and the it is kept stable for domestic stability, after the Trump Treasury falsely labeled Vietnam as currency manipulator based on Mercantilist beliefs.

Hiking domestic rates stops the domestic credit cycle from going beyond that of the Fed and triggering a credit and import bubble and depletion of reserves for imports, panic, and ultimately a balance of payments crisis.

Poor countries, with reserve collecting pegs who believe they can extend credit cycles with flexible or independent monetary policy (now called flexible inflation targeting) face collapsing currencies, sharply higher interest rates, social unrest and in extreme cases like Sri Lanka’s central bank and in Africa, malnutrition as food prices rocket.

Vietnam has so far rejected pressure from the International Monetary Fund to adopt independent monetary policy but it also has other interest rate control methods on broader credit which can make the currency vulnerable.

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