UAE will not follow Fed cut

Abu Dhabi: The UAE Central Bank said on Tuesday it would not cut interest rates if the US Federal Reserve eases its rate - the second time the country would refrain from mirroring the Fed.

Until late October, the UAE had been keeping its benchmark overnight repurchase rate at the same level as the Fed funds rate.

Then, in a shock move, the Central Bank decided not to track a 50-basis-point Fed cut on October 29, keeping its overnight repurchase rate at 1.5 per cent.

"No, we will not cut," Sultan Nasser Al Suwaidi told reporters in Abu Dhabi when asked whether the UAE would match a Fed cut expected late on Tuesday.

"Let them [Federal Reserve] do according to their monetary policy."

The Fed is expected to cut rates by 50 basis points to 0.5 per cent, and most states in the oil-exporting Gulf have tended to shadow American interest rate policy to maintain the relative value of their dollar-pegged currencies.

Saudi Arabia slashed interest rates yesterday ahead of the US Federal Reserve policy announcement as it strives to boost liquidity.

In November Al Suwaidi said the UAE opted not to track the last Fed cut to bring local rates closer in line with levels in other Gulf countries.

The Kuwaiti benchmark is at 4.25 per cent and Saudi Arabia's is at 2.5 per cent.

Al Suwaidi said this week that policymakers in the GCC, which also includes Saudi Arabia, Kuwait, Qatar, Oman and Bahrain, wanted to coordinate their interest rates as most of them prepare for monetary union by a 2010 deadline.

Impact

"The UAE benchmark lending rate is substantially below the lending rates of other GCC central banks ... and any cuts in the benchmark rate will have limited impact on reducing the interbank rate," EFG-Hermes economist Monica Malik said in a note on Tuesday.

"We believe the focus of the UAE Central Bank will be to inject liquidity directly into the banking system as required," she said.

The Central Bank and Finance Ministry have together launched Dh120 billion in emergency funding since September to support the banking system.

A global financial meltdown has put the brakes on a six-year oil-fuelled boom across the Gulf region, prompting policymakers to take a slew of measures to defrost money markets and restore investor confidence.

In the latest step yesterday, the Saudi Arabian Monetary Agency (Sama) reduced its repurchase rate by 50 basis points to 2.5 per cent, the fourth reduction in its benchmark lending rate since the global financial crisis intensified in October.

Sama also cut its deposit rate, the reverse repurchase rate, for the first time since April to 1.5 per cent from 2 per cent, saying the cuts aimed to ensure adequate liquidity to meet domestic credit demands.

"The central bank is concerned the private sector won't be able to follow through with project fin-ancing commitments," said Paul Gamble, head of research at Riyadh-based Jadwa Investment.