Higher interest rates in the US are a mixed blessing for Malta as exports in euros  are likely to become more competitive, but oil purchases will become more expensive.

The US Federal Reserve increased interest rates by a quarter of one per cent on Wednesday on the back of an improving economy.

The hike may not seem much but according to economist Philip von Brockdorff, senior lecturer at the University of Malta, it is “extraordinary” because it is the first time rates have increased in almost a decade.

The decision is likely to see the value of the dollar rise, which would make exports from the eurozone more competitive.

“Malta’s exports in euro could become more competitive, which is a boon for the manufacturing sector but on the flip side the rate rise may become an issue for microchip maker ST, which trades in dollars,” Dr Brockdorff said.

Malta’s exports in euros could now become more competitive

A stronger dollar could eventually also increase the cost of oil imports since the commodity is traded in the green currency. Crude oil has hit almost $40 per barrel but the downward push as a result of oversupply may be mitigated by a higher exchange rate.

However, Dr Brockdorff said the negative impacts may not be immediate because it also depended on when existing trade contracts expire.

The US interest rate hike will have a bigger impact on countries that trade and hold debt in dollars.

“Countries with sovereign debt in dollars would have to contend with higher interest payments as a result of the Federal Reserve’s decision,” Dr Von Brockdorff said.

For Central Bank of Malta governor Josef Bonnici the move has solidified the divergence in monetary policy between the Federal Reserve and the eurozone. In Europe easier borrowing terms are being implemented to try and boost economic growth.

The European Central Bank earlier this month cut overnight deposit rates from minus 0.2 per cent to minus 0.3 per cent and extended a €60 billion stimulus programme.

The move is intended to encourage banks to loan out money to businesses and consumers rather than keep it dormant. Prof. Bonnici said that financial markets could see greater currency flows out of the eurozone to the US to benefit from higher interest rates.

This would weaken the euro but it might not be a bad predicament because it will make eurozone exports more competitive, he added.

But Prof. Bonnici noted that the Federal Reserve’s decision had long been expected: “It would have been priced in so it is unlikely there will be a dramatic impact, at least for the time being.”

He said very low interest rates could lead to imbalances in the market and risk creating bubbles in other sectors of the economy such as the property market.

“It is good to keep rates low when there is a financial and economic crisis, but it is also right to start seeing them increase when growth picks up,” Prof. Bonnici said.

Interest rates hit rock bottom in the wake of the 2008 financial crisis, which conditioned banks to be risk-averse as they tried to pay off debts and wean themselves off over-borrowing.

Central banks tried to stimulate broken economies by slashing interest rates, making it cheaper to access credit.

Employment levels in America are high and growth is running at just over two per cent, which prompted the Federal Reserve to notch up interest rates by 0.25 per cent.

Any future increases are expected to be gradual.

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