US Aligns with Global Central Banks in Inflation-Fighting Rate Hike

The US Federal Reserve has raised its benchmark rate by a quarter percentage point for the first time since 2023, citing a strong economy that can absorb tighter monetary policy to combat inflation. This move aligns with similar actions taken by other central banks, including Singapore's Monetary Authority of Singapore (MAS), which tightened its policy stance in July to ward off the risk of rising energy prices.

According to Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, geopolitical fragmentation, energy security, larger fiscal footprints, supply-chain duplication, and the capital intensity of the AI investment cycle all point towards a world where inflation is likely to remain more persistent. He notes that as long as investments required for data centres, semiconductors, power, grids, infrastructure, and financing remain strong, the US economy may be able to absorb higher rates more easily.

The Fed's rate hike comes after a 25 basis-point rate increase by the European Central Bank, its second hike this year. The Bank of Japan also raised its benchmark interest rate by a quarter percentage point in June. The move is expected to weigh on real demand and hence export volumes, according to Sheana Yue, senior economist at UK-based research firm Oxford Economics.

However, James Ooi, market strategist at Tiger Brokers in Singapore, believes that the stronger growth and higher profit margins of technology companies relative to traditional sectors could help offset the impact of higher rates. This could ultimately make tech stocks a preferred asset class in a flight to growth and quality.