Stocks rally after Central Bank slashes interest rate

Abu Dhabi: The UAE Central Bank cut the interest rate on its repurchase of Certificates of Deposits (CDs) by 0.75 per cent yesterday from 4.25 per cent to 3.5 per cent.

Although the local stock markets reacted positively to the rate cut, economists and bankers said the move could fuel the already high inflation in the country. The market posted sharp gains yesterday, with the DFM index posting 10.45 per cent increase and the Abu Dhabi General Index gaining 6.34 per cent from the previous day's closing.

The UAE's decision comes in the wake of a similar cut by the US Federal Reserve Bank on Tuesday as an emergency measure to salvage the crashing stock markets. "If the US Federal Reserve decides on further cuts by the end of the month, most probably we will follow suit," Mohamed Abdullah, assistant executive director of the Central Bank's treasury department told Gulf News. "Real interest rates were already negative and today's cuts will place them further into negative territory," said Monica Malik, an economist with EFG Hermes.

Senior officials at the National Bank of Abu Dhabi urged the authorities yesterday to revise the current exchange rate, which undervalues the dirham.

"Lower interest rates will result in increasing the demand for borrowing, and hence increasing inflation, while the current exchange rate of the dirham against the dollar set at Dh3.673 undervalues our currency by at least 30 per cent in my personal assessment," said Saif A. Al Shahhi, senior manager of the Domestic Banking Division at the National Bank of Abu Dhabi (NBAD).

"The US need for cutting the rates emerge from the slowing economy, but in the UAE, where economic growth is of an average of 9 per cent annually, a totally different monetary policy is needed," said Abdullah K. Al Otaiba, head of NBAD's corporate banking group.

The lower interest rate on the dollar may result in further depreciation of the greenback in the foreign exchange markets.

Rate cut: Gulf states follow suit

Five Gulf central banks cut interest rates yesterday with the lone exception of Oman. Kuwait reduced rates by a lesser 50 bps bringing its repo rate to 4 per cent. Saudi Arabia, Bahrain and Qatar Cut Deposit Rates by 50 basis points each. Saudi Arabia, Bahrain and Qatar continued their policy of reducing the reverse repurchase (deposit) rate, while holding the repurchase (lending) rate. The Saudis also cut the reverse repo rate by a lesser 50 basis points to 3.5 per cent while keeping the repurchase rate at 5.5 per cent.