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Fed may hike rates by 25bps: UBS

June 29, 2006 15:32 IST

Director of FX Research and Strategy at UBS, Nizam Idris expects the Fed to increase rates by 25 bps. He anticipates the Fed to deliver a more market-neutral statement.

Idris also adds that the Fed statement may provide room for more hikes and that markets are factoring in one more hike.

According to him, Asian currencies will be factoring in two hikes over the next two meeting.

Excerpts from CNBC-TV18's exclusive interview with Nizam Idris:

What do you expect the Fed to say and what do you think the policy might indicate?

I expect that the FOMC has been a source of volatility more than what the authorities would have liked in recent months. Therefore, given that sort of a background, today they will try to provide more certainty or at least they could to be more market neutral.

By that, I mean delivering 25 bps points hike and then to deliver a statement, which is market neutral in which they will follow the recent trend of probably highlighting the potential for high inflation and also mentioning the risk of lower growth.

But what is more important is the policy guidance; there could still be more hikes but they would be very data dependent.

Do you think he will actually clearly lay out that there could be more hikes going forward?

In the last statement, we already have arguably provided room for more hikes without making it sound like a surprise. What is really missing in the May statement, which triggered market reaction was an indication of a pause.

I do not think they would change that statement this time around to indicate the higher possibility of a pause.

Where do you think they might end this year with and how much is the market factoring in at this point?

At this point, the market is expecting two more hikes including one tonight; we are looking for that as well at UBS. But there is of course a possibility of the market going further beyond that and I think group data as well as inflation data would be very crucial here.

We also have a new Fed Chairman who needs to establish credibility that could actually mean him preferring to make a mistake on an overshoot rather than an undershoot offer in the interest rate hike.

What is your call on the dollar particularly versus Asian currencies?

I think for tonight, Asian currencies are pretty much expecting a 50 basis points hike over the next two monetary policy meetings; tonight and the one in August. Barring any surprise in the change in statement, I do not think the market would react as violently as it did in May.

In fact, if we get the slightest indication that there could be a pause after August, which I do not think there will be, then that could actually see the dollar giving up some of its gains that we have seen since May.

What about overall bond and equity markets, if he delivers 25 bps and remains fairly neutral on the policy guidance front, do you think the markets are ready for a relief rally or would it remain neutral as well?

I think the market has been hit quite a bit by what happened in May. I do not think the market would therefore be keen to move ahead of policy indications by rallying on the slightest indication of a pause. I do not think that would happen yet. Equally importantly, I do not think the market would react negatively as it did in May as well.

What is likely to happen therefore is this attitude of 'wait-and-see' because the next meeting is in August and there is a lot of data that will come in between tonight and the August meeting. There is a lot of data to see and to react to. What I would expect therefore, is that the FOMC statement alone would not trigger too much of a reaction tonight.

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