x Abu Dhabi, UAEWednesday 26 July 2017

Key bank rate trimmed to boost bank liquidity

The Central Bank has reduced the cost for banks to borrow from its liquidity support facilities.

The Central Bank has reduced the cost for banks to borrow from its liquidity support facilities in another move aimed at boosting the flow of cash through the UAE's financial system. From today, the interest rate on its liquidity support facilities to banks will be reduced to 1.5 per cent from 2.5 per cent, the Central Bank said yesterday. "Implicitly, the Central Bank is providing this measure to raise lending and give easier access to liquidity, and it is in line with its attempt to lower interbank rates," said John Tofarides, a Moody's analyst.

It comes as the financial regulator takes steps towards boosting liquidity in the banking system and have greater involvement in determining the Emirates interbank offered rate (Eibor), the rate banks use to lend short-term funds to each other. "This measure would basically reduce cost of economic activities in the UAE, particularly investment spending, and would contribute to sustained growth and support the national economy in general," said the Central Bank in a statement about the interest rate cut.

The Central Bank has already made several moves to help banks overcome the fallout from the financial crisis, including guaranteeing banking deposits and arranging to pump Dh120 billion (US$32.67bn) into the financial system. The Central Bank introduced its Dh50bn emergency lending facility in October when the government intervened to provide banks with fresh funds. But banks have so far made little use of the facility.

"The move brings the interest rate more in line with global interest rates," said Mahdi Mattar, chief economist at Shuaa. tarnold@thenational.ae uharnischfeger@thenational.ae