Dubai: Central banks in most GCC countries raised their lending rates following the hike in key lending rates by the US Federal Reserve for the fifth consecutive quarter on Wednesday.
The latest round of Fed rate hike followed unanimous vote of the Federal Open Market Committee (FOMC) that ruled against the call for stimulating the economy for further jobs and wage growth. The benchmark rate will now be in a range from 2.25 per cent to 2.5 per cent.
GCC economies, with the exception of Kuwait, have their currencies pegged to the dollar, usually hike domestic lending and deposit rates in tandem with the Fed rates to avoid currency speculation and potential capital flight resulting from interest rate arbitrage opportunities.
The Central Bank of the UAE (CBUAE) has announced that, effective December 20, 2018, it will raise interest rates applied to the issuance of its Certificates of Deposits in line with the [25 basis points] increase in interest rates on US Dollar.
The repo rate applicable to borrowing short-term liquidity from CBUAE against Certificates of Deposits has also been increased by 25 basis points.
Saudi Arabian Monetary Authority (Sama, the central bank of Saudi Arabia) has also announced 25 basis points increase in repo (short term lending) rate from 275 basis points to 300 basis points and the reverse repo (deposit) rate from 225 basis points to 250 basis points. “Policy rate adjustments are consistent with preserving monetary stability,” Sama said in a statement on its website.
Qatar and Bahrain also made adjustment to their domestic rates following the Fed rate hike. While Qatar central bank raised its deposit rate by 25 basis points to 2.5 per cent, The Central Bank of Bahrain (CBB) raised its one-week deposit facility is raised from 2.5 per cent to 2.75 per cent, overnight deposit rate from 2.25 per cent to 2.50 per cent, the lending rate from 4.25 per cent to 4.5 per cent while the one-month deposit rate will remain the same at 3.25 per cent.
Kuwait’s currency is not pegged to the dollar, instead is linked to a basket of currencies and thus the central bank exercises some amount of flexibility in its monetary policy. Although the currency basket to which the currency is pegged has substantial dollar weightage, the Central Bank of Kuwait (CBK) decided to maintain the interest rate unchanged at its current level of 3 per cent.
Despite the local currencies’ peg to the dollar, it is not unusual for central banks in the region to diverge from the Fed policy to some extent. For example, Sama started raising its benchmark repo (lending) rate for the first time in this current rate-hiking cycle in March 2018. Until this point, Sama had only raised its deposit (reverse repo) rate following increases in the Fed’s rate hike whilst keeping the lending rate steady.
“We interpret these hikes as Sama maintaining the 50 bps differential between its repo rate and the upper bound of the Fed’s FFTR. We believe that this is now aimed at supporting the level of capital in SAR terms rather than limiting upside pressure on lending rates,” Monica Malik, Chief Economist of ADCB wrote in a recent note.