CD rates fall in first UAE auction

Dubai: UAE one-week and one-year certificates of deposit (CD) rates fell yesterday at the Gulf state's first CD auction, two officials at Emirates NBD said.

The central bank said it would not immediately release the results of the auction for terms ranging from one week to 12 months.

The cut-off for the one-week CD rate fell to 4.2 per cent compared with 4.4 per cent on Tuesday, and the one-year rate to 4.05 per cent from 4.15 per cent, said the bankers, who did not want to be identified.

The central bank said on Tuesday it would switch to a CD auction from a fixed-rate system that will determine interbank lending rates. The bank would also allow the UAE's first repurchase agreements, it said.

The UAE has no benchmark interest rate. The central bank has guided interbank borrowing costs by selling dirham-denominated certificates, cutting them by much as 20 basis points last week to deter bets on a dirham appreciation.

The maturity of the longest-dated certificate will be extended from 18 months to five years, a statement on the central bank Web site said.

"Banks are allowed to enter into a repurchase agreement with the central bank or among themselves," the central bank said on its website. Repo rates, from overnight to three months, will be determined by demand, it said.

Banks will be allowed to hold certificates in euro and dollars as well as dirhams, it said.

"This is a formal introduction of the euro in the whole system," said Marios Maratheftis, regional head of research at Standard Chartered in Dubai. "If we are talking about moving to a currency basket in the future, this probably suggests the composition of a future basket," he said.

"We don't have the auth-orisation... we cannot declare anything," said an official in the central bank's treasury department.

"We got an allotment," said John Eldredge, treasurer at Emirates Bank International, a unit of Emirates NBD. "We bid in a range of tenures and we were allotted some." Eldredge could not immediately confirm the change in rates.

Bankers in the UAE and Bahrain said the move is likely to lower interbank rates.

"Short-term money market rates are going to collapse," Malcolm D'Souza, president of the UAE Fin-ancial Markets Association and head of treasury at National Bank of Ras Al Khaimah (Rakbank), said.

"We could see the one-month CD fall from 4.5 per cent to three per cent," he said. "There's a lot of dirham liquidity trapped in the system."

Investors have piled on to the dirham since central bank Governor Sultan Nasser Al Suwaidi said this month he was under growing pressure to abandon the peg to the sliding dollar to contain inflation.

"The lower interest rates are unlikely to reduce inflows into the dirham or reverse the amount that has already flowed in," Monica Malik, Middle East econ-omist at EFG-Hermes investment bank in Dubai, said in a note.

"Dirham purchases have been driven by speculation of a revaluation or a move to a currency basket, rather than a differential in interest rates," Malik wrote.