US interest rate may rise to 3% on inflation pressures: Analysts

US Federal Reserve headquarters 

The US interest rate is expected to continue rising significantly to reach 3% late this year or 2023 on inflation pressures and commodity prices, analysts told Argaam.

Iyad Ghulam, Head of Equity Research at SNB Capital, said inflation was considerably higher than expected in May. Analysts’ expectations were that inflation in May would exceed the March level; however, it hit the highest level in 40 years last month.

Investors need signs of reassurance from the Federal Reserve that it is able to tackle the inflation issue, Ghulam said, adding that inflation may continue until the end of this year due to growth in commodity prices that push inflation higher.

The Federal Reserve should take action to curb the constant rise in inflation, the analyst said, expecting a 75-basis-point rate increase.

Raising interest rates will significantly put pressure on the stock market assessment and may negatively affect markets and companies with high loans or whose evaluation was high, Ghulam said.  

He added that some sectors will benefit from interest hike, such as companies with low loans, those that sell commodities such as oil or the firms that operate in the retail sector and witness strong demand. 

Elsewhere, Ghulam indicated that there are factors that may control inflation, such as the Federal Reserve's significant interest hike, handling of supply chain issues, and end of Russian-Ukrainian war. 

Jassim AlJubran, Head of Research at AlJazira Capital, said the interest rate will be raised during the Federal Reserve’s next meeting by nearly 50 basis points, and increased further if the inflation continues to accelerate.

He added that the interest rate would range between 2.75- 3.0% by the end of 2022, in light of the Federal Reserve's continued intention to control inflation.
 

The US central bank’s current situation requires a balance between maintaining the strong performance of stock markets and control of inflation that exceeded expectations in light of energy, commodity and food price crises, AlJubran noted.
 

On other hand, Mazen Al Sudairi, Head of Research at Al Rajhi Capital, said the interest rate would reach 3% in the long term, noting that the US 10-year Treasury yield reached more than 3%.
 

Al Sudairi expressed optimism about the decline in inflation, indicating that the Federal Reserve’s decision to increase the interest rate by 50 or 75 basis points would not be surprising. 
 

The markets took into account a potential rise in interest rate, and this was reflected on prices, the analyst concluded.