DUBAI/ABU DHABI, (Reuters) – Saudi Arabia joined Kuwait and Bahrain in lowering interest rates to ease credit conditions and underpin their banking systems on Thursday while the United Arab Emirates made a shock decision for the first time not to match a U.S. interest rate cut.
The latest move by Saudi Arabia marks the second reduction of its benchmark repurchase rate this month alone. The bank — which had not lowered the repo rate in four years prior to October — said easing inflationary pressures and expectations made the cut possible.
It cut the rate by 100 basis points to 4 percent.
“The central bank’s primary intention is to lower the cost of funding, which is a great concern for the private sector,” said John Sfakianakis, chief economist at SABB bank, HSBC’s Saudi affiliate.
The Gulf has massive infrastructure projects under way designed to diversify its economic away from relying on oil export revenues.
Many of these projects are public-private partnerships — but private investors are finding it difficult during the global credit crunch to access abudant and cheap funds.
Gulf Arab officials, like the rest of the world, have raced to alleviate the impact of the global financial crisis. They have slashed rates, guaranteed bank deposits, supported stock markets and poured billions into their banking systems.
The round of Gulf rate cuts on Thursday was aimed at defrosting frozen interbank lending rates. But at least one state, the UAE, decided it was not a useful tool and opted to stay on the sidelines.
The UAE, which pegs its currency to the dollar, left its rates untouched, according to central bank sources, despite the Federal Reserve’s 50-basis-point rate cut on Wednesday. The Gulf Arab state had lowered rates earlier this month, following a similar move by the Fed.
“We think cuts are not having the impact on local money markets and it is not meaningful at this point to cut,” one central bank official told Reuters.
A UAE central bank spokesman declined to comment.
Qatar, which sat out the last round of rate cuts earlier in October, also did not move interest rates immediately.
“Qatar hasn’t taken any decision to cut rates,” said a central bank official, who declined to be identified because he was not authorised to speak to the press.
“WILL NOT HESITATE”
For much of this year, Gulf states had responded to Fed cuts by lowering only deposit rates while keeping their lending rates on hold to prevent lower borrowing costs from stoking record-high inflation.
But the liquidity situation of Gulf banks has taken a 360-degree turn since the summer as the credit crisis spurred by defaults on U.S. subprime mortgages spread across the world, prompting Gulf officials to unleash a slew of policy responses.
In contrast to the UAE, Kuwait and Bahrain lowered interest rates for the second time this month in a bid to defrost frozen lending markets.
Kuwait, the only Gulf Arab state without a dollar peg, was forced to save its fifth-biggest lender from collapse earlier this week and its sovereign wealth fund has been pumping funds into a slumping local stock market.
“We will not hesitate to take the necessary action and procedures to strengthen stability of pillars of the national economy and preserve the safety and strength of the local banking sector,” central bank Governor Sheikh Salem Abdul-Aziz al-Sabah told state news agency KUNA on Thursday.
Meanwhile, Bahrain slashed its repurchase and overnight rates by a massive 125 basis points on Thursday and said the move reflected current interbank lending rates.
The island kingdom lowered its repo and overnight rates to 3.50 percent from 4.75 percent and expanded acceptable collateral for overnight funds to include ijara sukuk, a type of Islamic bond.
Following a number of measures to try to stabilise money markets this month, UAE and Saudi interbank rates have stabilised but not fallen after nearly doubling in four months.
In Kuwait, on the other hand, interbank rates are down 25 basis points this month while Bahraini interbank rates have dropped more than 30 basis points in the past two weeks.
Oman sets interest rates once a week, on Mondays.