The US Federal Reserve building in Washington Image Credit: EPA

The Federal Reserve on Wednesday held its benchmark interest rate near zero. Despite the optimism about the economy, the Fed Chairman Jerome Powell said the US central bank is nowhere near considering a rate hike.

With most GCC currencies (Kuwaiti dinar is pegged to a currency basket) pegged to the US dollar, the region’s monetary policies will largely remain latched to the Fed’s and there are no compelling reasons for any divergence currently.

Lower interest rates and a relatively subdued dollar bode well for GCC economies as these attract more investments to the region. The availability of cheap funding at a time the region is in the cusp of a rapid post-Covid recovery is certain to boost capital expenditures by corporates and government-related entities.

The continuing low Fed rates also would checkmate the dollar’s gains against other currencies. In effect, tame relative exchange rates of GCC currencies against other global currencies because of their peg to the dollar could make regional asset classes such as real estate and stocks attractive to foreign investors and help the prospects of sectors such as travel and tourism.

The continuing surge in oil prices is certain to improve the fiscal balances and external accounts of the UAE and its GCC neighbours. On top of that, a further extension of low interest rate will work as a bonus in terms of cost and availability of funds.

Clearly, bankers will not be a very happy lot, as the low interest rate environment will continue to squeeze their margins. However, higher lending volumes supported by improving economies would, by and large, offset the pressures on banks’ margins.

While the global central banks are moving in the direction of winding down monetary stimulus, the recent decisions by both the Fed and Bank of England to hold the rates at record lows point to a very cautious approach.

Although global economic recovery continues, the momentum has been weakened by the prolonged impact of the pandemic. Central banks across the world are trying hard to support economic recovery. However, there are indications that inflation is headed north as supply chain bottlenecks and rising commodity prices are getting translated into both input and output price surge. If the price trajectory inclines upwards for longer, we will soon see central banks change their dovish stance.

As for GCC states, with the oil prices on the rise, supported by both supply and demand factors, a gradual resetting of global interest rates will not have any big impact on their recovery momentum.