ABU DHABI: The Central Bank of the UAE (CBUAE) has decided to raise the Base Rate applicable to the Overnight Deposit Facility (ODF) by 50 basis points, effective from Thursday, May 5, 2022.
The CBUAE also has decided to maintain the rate applicable to borrowing short-term liquidity from the CBUAE through all standing credit facilities at 50 basis points above the Base Rate.
The Base Rate, which is anchored to the US Federal Reserve’s IORB, signals the general stance of the CBUAE’s monetary policy. It also provides an effective interest rate floor for overnight money market rates.
This decision was taken following the US Federal Reserve Board’s announcement on Wednesday to increase the Interest on Reserve Balances (IORB) by half a percentage point, the biggest jump in 22 years, and said it would begin trimming its bond holdings next month as a further step in the battle to lower inflation.
The increase in the Fed's key rate raised it to a range of 0.75 per cent to 1 per cent, the highest point since the pandemic struck two years ago.
The Fed also announced that it will start reducing its huge $9 trillion balance sheet, which consists mainly of Treasury and mortgage bonds. Those holdings more than doubled after the pandemic recession hit as the Fed bought trillions in bonds to try to hold down long-term borrowing rates. Reducing the Fed's holdings will have the effect of further raising loan costs throughout the economy.
Gulf central banks raise rates
All Gulf countries have their currencies pegged to the US dollar, except Kuwait, which pegs the Kuwaiti dinar to a basket of currencies that includes the dollar.
The central banks of Saudi Arabia, Qatar and Bahrain raised their key rates by 50 bps. The Central Bank of Kuwait said it increased its discount rate by 25 basis points (bps) to 2%, in a move less hawkish than the Fed's.
The Central Bank of Kuwait said it increased its discount rate by 25 basis points (bps) to 2 per cent, in a move less hawkish than the Fed's. It said it also changed other rates, including on CBK bonds, term deposits and direct intervention instruments, without specifying by how much.
The Saudi Central Bank (SAMA) raised its repo rate and reverse repo rates by 50 bps each to 1.75 per cent and 1.25 per cent, respectively.
The Central Bank of Qatar said it would raise, effective on Thursday, its deposit and repo rates by 50 bps to 1.5 per cent and 1.75 per cent, respectively. Its lending rate will increase by 25 bps to 2.75 per cent.
The central bank of Bahrain also raised their key rates by 50 bps. The Central Bank of Bahrain said it raised its key policy rate, on its one-week deposit facility, by 50 bps to 1.75 per cent, in lockstep with the Fed's hike.
The CBB also increased its overnight deposit rate and lending rates by 50 bps to 1.5 per cent and 3 per cent, respectively, and its four-week deposit rate was increased by 75 bps to 2.5 per cent.
The Central Bank of Oman - the other member of the Gulf Cooperation Council - is widely expected to follow with a similar move.
