Hiking policy rates by the US Federal Reserve Bank has a chain of effects worldwide; it prompts developed economies to hike interest rates to catch up with the world's biggest economy.
Apart from making loans costlier, such a move makes the dollar more powerful against other currencies. And the dollar going stronger is bad news for emerging economies like Bangladesh. As commodities are mostly priced in dollars, now their import bills for everything – from oil and food to raw materials – will go up, the trade deficit will widen further and spike consumer prices further.
This is how a monetary step to tame inflation in the US can cause inflation to surge in countries like Bangladesh, as explained to The Business Standard by economists and traders.
"A further rise in dollar price means Bangladesh's consumers won't get the benefit from expected fall in global prices," says Taslim Shahriar, senior executive of Meghna Group, a leading food commodity exporter. Prices of some food items showed signs of easing from the historic peaks caused by the Russia-Ukraine war in the past couple of weeks, he noted.
Fed rate hike ripples thru' Europe, Asia
As American inflation was running at a 40-year high, the US Federal Reserve went for a massive hike, third since March, in the key interest rate on Wednesday and with hints of further hikes in coming months.
Quick response came from its counterparts in Europe.
Central banks across Europe raised interest rates on Thursday by a level not seen in some countries since the 1970s oil crisis to tame soaring inflation that has broadened out to everything from food to services with double digit readings in parts of the continent, says a Reuters report.
The Bank of England lifted borrowing costs by the quarter point as part of its cautious but forceful act to stamp out dangers posed by an inflation rate heading above 11%.
The Swiss National Bank and the National Bank of Hungary both caught markets off guard with big upward steps, just hours after the US Fed step.
The Reserve Bank of Australia was even a step ahead, raising the key rate more than a week ago.
The Federal Reserve's super-sized rate hike and firm policy tightening trajectory is prompting Asian central banks to weigh their options, seeking a balance between local inflation dynamics and a restless bond market, Bloomberg reported.
Aggressive tightening of monetary policy to check runaway inflation runs the risk of tipping the US economy into recession, with similar impacts in rich economies.
This means Western consumers will spend less – a fresh worry for Bangladesh's apparel exporters as North America and Europe are their key markets.
Mohammad Hatem, a leading knitwear exporter and executive president of BKMEA, said the US interest rate will deal another big blow to the world.
"The increased dollar interest rate will ripple out to us in the form of lower apparel export orders following decreased sales of buyers," he feared.
US stock markets responded immediately to the rate hike aimed at bringing down US inflation from a 40-year high of 8.6% to the level Fed target of 2%.
As an immediate impact, The Dow Jones Industrial Average, after an initial slide, rose strongly.
The global dollar index , which tracks the greenback against a basket of six peers, was last up 0.27% at 105.08, with the dollar jumping against yen and euro.
In commodity markets, oil prices recovered from a steep drop, with Brent crude closing $118.83 and US crude $115.88 per barrel.
Gold was slightly lower at $1,831.26 per ounce, as the dollar firmed.
The Bloomberg Commodity (BCOM) Index, which measures price movement of a broader basket of commodities like energy, grains, industrial metals, precious metals, sugar, coffee, cotton and livestock – rose by 1 percentage point to 130.15 Thursday afternoon from a day before.
"Global commodities are priced in dollars so from their own point of view, a stronger dollar in this environment is not good for them at all," Geoffrey Yu, senior EMEA market strategist at BNY Mellon, told CNBC, referring to possible impacts on trade-heavy economies, be it Switzerland or Japan or any of the emerging markets.
Even in India, which is more integrated to global financial markets than Bangladesh, benchmark indices were up in opening trade on Thursday. India's money market is now worried about foreign portfolio, bond and equity investments as the Fed rate cut is feared to discourage dollar investments there from abroad because of higher returns in the US debt market.
This fear is supported by a Bloomberg report that says soaring US interest rates place downward pressure on currencies in Asia and lure foreign investors away from the region, forcing central banks in the region to raise their own funding benchmarks in response.
Whereas global inflation has taken on a different flavour in Asia – in some cases allowing central bankers to be more patient – the Fed continues to add tightening pressure worldwide. Despite fighting inflation at a 13-year high, Thailand has still kept the benchmark interest rate unchanged for two years. Malaysia is planning to raise the overnight policy rate, but South Korea has not yet decided on a rate hike soon.
Bangladesh may also face a potential impact on currency markets stemming from higher prices and more outflows of dollars in terms of import payment and servicing external debt--both public and private.
Ramifications for Bangladesh
The central bank is struggling to keep the dollar exchange rate within the agreed ceiling amid reports that banks are routinely flouting its instruction to sell dollars at Tk93 to importers for opening letters of credit. Local currency taka has been devalued several times in recent months and finally set at Tk92.80 on Tuesday.
The dollar rose once again to Tk92.85 on Thursday, prompting the Bangladesh Bank to sell $28 million to banks to help them meet rising demand for dollars.
The central bank sold $64 million on Wednesday. So far, it pumped more than $7 billion into the market in the current fiscal year.
But importers say they are not getting it at this rate from most of the banks. Bankers argued that exporters are asking for a higher rate for dollars while cashing their export proceeds and making it impossible for them to trade dollars within the agreed rate.
Interbank overnight call money rate reached its two-year high of 5.02% earlier last week and maintained that level throughout the week that ended Thursday.
Further hike in dollar exchange rate would prompt cash-hungry banks to borrow more from the money market to buy dollars from the central bank, further influencing the overnight rate, bankers fear.
Ahsan H Mansur, economist and executive director of local think tank Policy Research Institute said since the Fed rate hike would increase the demand for the dollar globally, the value of the local currency of almost every country will decrease.
Huge amounts of dollars, invested in equities, portfolios and even foreign direct investment, will flow to the US from emerging and developing countries, he warned.
What can Bangladesh's central bank do in response to rate hikes by American and European central banks?
Is a policy rate hike a viable option to save dollars and keep inflation in check?
Bangladesh Bank Chief Economist Md Habibur Rahman said the impact of the US Fed decision has already been reflected in the global market, though, he hoped, the aftermath effect may not be that severe. The US stock market has already steeply plummeted and likewise, China's and Japan's stocks have fallen significantly, he noted as markets' response to Fed rate hike.
All sorts of interest rates including bills and bonds will increase making debt servicing expensive, he warned.
Since inflation remains a concern for central bankers in Bangladesh too, the BB chief economist said, "We need to find ways to control rising import bills."