KUWAIT, (Reuters) – Kuwait’s central bank has decided to cut its benchmark discount rate by 25 basis points to 3.5 percent effective Monday to reduce the cost of funding and stimulate the local economy, the state news agency reported.
The reduction would take the total benchmark rate cut by the world’s seventh-largest oil exporter to 225 basis points since October, when the government was forced to rescue Gulf Bank after it recorded steep derivatives losses.
“The decision to cut the discount rate at the central bank of Kuwait contributes another dose to push the wheel of local economic activity through cutting the cost of finance,” Sheikh Salem Abdul-Aziz al-Sabah said, according to KUNA.
Sheikh Salem said last month he expected the economy to contract this year as oil prices slump and economic activity is hit.
KUNA did not say whether the central bank had also decided to cut its repurchase rates. Kuwait last reduced its discount rate by 50 basis points to 3.75 percent in December.
Since the global financial crisis deepened in the autumn, Gulf oil producers announced a slew of measures to unlock credit markets, including in the case of Kuwait guarantees of bank deposits and state equity investments.
“At the moment they are trying to use a number of tools available to support growth,” said Monica Malik, a regional economist at EFG-Hermes in Dubai.
“Although these moves will support bank lending to a degree, we are still forecasting a marked deceleration in credit growth.”
Since approaching 5 percent in late September, the three-month Kuwaiti interbank rate has fallen to 2 percent, indicating that while banks had funds, they were reluctant to extend fresh loans.
Kuwait’s central bank has issued treasury bonds worth about 480 million dinars in the last two months to soak up some of this liquidity.
The latest interest rate move coincides with the enactment of a state support package for the financial sector, Sheikh Salem said on Sunday.
Kuwait’s emir dissolved parliament in March, which gave the government the authority to push through an economic support package by decree that is designed to enable banks to lend about 4 billion dinars ($13.76 billion) in the coming two years.
The plan, which would cost the state 1.5 billion dinars, includes state guarantees of up to 50 percent of new loans.
Sheikh Salem told Reuters last month he expected credit growth of not less than 19-20 percent this year as a result of the bill.
Kuwait, the only Gulf state that does not peg its currency to the U.S. dollar, has also allowed its currency to depreciate in an effort to reduce import costs and help bolster its dollar-denominated oil revenues, the governor said last month.
Several local banks have been demanding the discount rate — which guides lending and deposit rates — to be lowered to help shore up their businesses, according to media reports.