Business | Banking
UAE central bank cuts rates to cool currency market
Faced with heavy speculative buying of the dirham by banks, the UAE central bank lowered interest on three-month certificates of deposit (CD) by 10 basis points (one tenth of a per cent) yesterday.
- By Babu Das Augustine, Banking Editor
- Published: 23:45 September 25, 2007
Dubai: Faced with heavy speculative buying of the dirham by banks, the UAE central bank lowered interest on three-month certificates of deposit (CD) by 10 basis points (one tenth of a per cent) yesterday.
Central bank sources confirmed the rate cut yesterday and said that the bank has slashed the three-month CD rate to 4.70 per cent from 4.80 per cent. The UAE and Kuwait were quick to cut interest rates following the 50 basis points rate cut by the US Federal Reserve on Sep-tember 18. The UAE cut one-week CD rates to 4.60 per cent from 4.75 per cent and the one-month CD rate to 4.70 per cent from 4.85 per cent.
A relatively low rate cut by the UAE and the refusal of other GCC countries to slash their interest rates in line with the US rates had triggered speculation of an impending revaluation of the dirham. The dirham bids climbed to a five-year high of 3.6685 per dollar on Monday, the strongest since November 2002. Speculation that Saudi Arabia might drop its peg fuelled buying of the riyal on Thursday and Friday, pushing the rate to 3.7362 on Friday, its strong-est since December 1986. The fresh cuts take the UAE rate cuts to 25 basis points (0.25 per cent).
"The new rate cut is targeted at cooling the currency market that has witnessed huge demand for dirhams and heavy selling of the dollar. Until the UAE rates reach par with US rates, speculators will continue to bet on revaluation," said the treasury head of a local bank.
Impact
Economists expect the rate cut to further fuel the already high inflation rate of 9.3 per cent. "It will impact inflation negatively as it adds fuel to the investment boom," said Dr Eckart Woertz, programme manager, economics, Gulf Research Centre.
In May, Kuwait abandoned the dinar's peg to the dollar to contain inflation. Since then there has been strong speculation that the UAE and Qatar, which have the highest inflation in the GCC, will opt for reform.
Your comments
How can you run an efficient monetary policy when it is solely based on the monetary policy of another country? This is absurd!
Zak
Dubai,UAE
Posted: September 26, 2007, 05:48
This entire situation is absurd, couldn?t the economist's in charge of setting monetary policy predict such an outcome when they initially reduced the interest rate by 15 basis points?
Rahim
Toronto,Canada
Posted: September 26, 2007, 02:10
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