The move shows that governments worldwide are willing to take bold steps to prevent financial crisis from worsening.
Oman and Kuwait follow Fed in rate cuts
Kuwait and Oman lowered their key interest rates yesterday following a historic rate cut from the US Federal Reserve on Tuesday. Gulf economists and investors immediately turned their attention to the UAE Central Bank, which broke with tradition in October by not matching the Fed's previous rate cut and is expected to hold its ground again.
The cuts provided increasing evidence that governments around the world are willing to take extraordinary steps to prevent the financial crisis from worsening. On Tuesday, the Fed dropped its target federal funds rate to the lowest ever - 0 to 0.25 per cent. The UAE is not expected to mirror the move by cutting its own repurchase rate, which stands at 1.5 per cent, following statements from the governor of the Central Bank, Sultan bin Nasser al Suwaidi, on Tuesday that he would not do so.
"They may not cut... In these exceptional circumstances you may see exceptional measures taken," said Fabio Scacciavillani, an economist at the Dubai International Financial Centre. Under normal circumstances, the decision not to follow US monetary policy while still keeping the dirham pegged to the dollar could create a large flow of speculative money in and out of the country, which could be dangerous and destabilising. However, given the global unavailability of money, this had become less of a concern in recent months, he said.
"The Central Bank can maintain this interest rate divergence in the short term, but in the medium term the gap closes." Both Kuwait and Saudi Arabia dropped their repurchase rates by half a percentage point to 2.5 per cent, while Oman lowered its rate by 0.89 of a percentage point to 1.53 per cent. Qatar and Bahrain, which were closed for a national holiday yesterday, are also expected to cut interest rates within days.
Marios Maratheftis, the regional head of research for Standard Chartered, said the UAE may decide not to cut interest rates because, unlike some other GCC countries, it had been unable to lower interbank lending rates through central bank action. The three-month Emirates interbank offered rate, which measures the seriousness of the credit shortage, has remained relatively high for the past month at just below 4.5 per cent. Other regional interbank rates had fallen in the region over the same period as a result of central bank action in those countries, Mr Maratheftis said.
Gulf stock markets had mixed reactions to the cuts. The Kuwait Stock Exchange fell 1.04 per cent to 8,806.90 yesterday, and Doha shares also ended down 1.2 per cent at 6,642.60. Dubai and Abu Dhabi stock markets both rose slightly, while the Saudi Tadawul climbed 1.28 per cent. Kuwait's decision to cut the repurchase rate was described by its central bank as an attempt to ward off the effects of the global financial crisis. Kuwait is the only country in the GCC that does not peg its currency to the dollar, although it still pegs the dinar to a basket of currencies that includes the dollar.
"The central bank is ready, in view of the current sensitive economic state of affairs, to employ all monetary tools and supervision measures to bolster trust in the economy and sustain the national monetary stability," said Sheikh Salem Abdelaziz al Sabah, the governor of Kuwait's central bank. firstname.lastname@example.org