RIYADH, 20 September 2007 — Saudi Arabian Monetary Agency (SAMA) Gov. Hamad Al-Sayari said yesterday the Kingdom will keep interest rates unchanged after the United States cut its benchmark rate by 50 basis points. “After reviewing the situation of liquidity and the economic situation we feel there is no need for a change,” Sayari told Reuters in Riyadh.
“Once we notice something, we will take the appropriate measures,” he said. “We always take measures that are adequate for the situation and the needs of the local economy,” Sayari said, declining to be more specific.
Kuwait and the United Arab Emirates cut interest rates yesterday, raising the prospect that Gulf Arab economic growth and inflation may accelerate.
Kuwait, the Middle East’s fourth-largest oil exporter, cut its repurchase rate by 50 basis points to 4.75 percent, the central bank said, adding to its 25 basis-point cut last week.
“The US and Gulf economic cycles are out of sync,” said Monica Malik, Middle East economist at EFG-Hermes investment bank in Dubai. “Cuts will increase credit growth, liquidity and money-supply growth in the GCC, which will add to inflationary pressures.”
The Gulf Cooperation Council comprises Saudi Arabia, the UAE and four other Gulf Arab oil producers, with all but one — Kuwait — pegging their currencies to the dollar.
The six countries, which also include Qatar, Oman and Bahrain, tend to track US interest-rate changes, limiting their ability to fight inflation that has surged as a quadrupling in oil prices since the start of 2002 has fuelled economic growth.
The UAE cut its one-week, one-month and three-month certificate of deposit (CD) interest rates by 15 basis points, the central bank said. It does not have a benchmark rate.
The US Federal Reserve on Tuesday agreed unanimously to cut its benchmark federal funds rate to 4.75 percent in a move to shield the world’s largest economy from a housing slump and financial turbulence. “To go further than the Fed seems curious,” Standard Chartered Middle East economist Steve Brice said of Kuwait’s 75 basis-point cumulative cut. “It may suggest they may want to guide interest rates even lower.” Inflation in Kuwait was at a 12-year high in April, and in Qatar at a record 14.81 percent in March.
The UAE, the second-largest Arab economy, cut the one-week CD to 4.60 percent and the one-month CD rate to 4.70 percent. The three-month CD rate fell 15 basis points to 4.80 percent and the six-month rate was cut by 20 basis points to 4.80 percent. “We’re looking at the UAE doing the whole 50 basis point cut, adjusted over a few days,” said Brice, who is keeping his forecast for UAE inflation this year unchanged at 9.3 percent. UAE inflation surged to a 19-year high of 9.3 percent last year.
Oman, Qatar and Bahrain have so far left their interest rates unchanged. “We will judge what will be the impact of the cut on our market; on inflation, on interest rates and on our peg to the dollar,” Omani Central Bank Executive President Hamood Sangour Al-Zadjali told Reuters by telephone. The central bank will consider what to do during its next working-week, which starts on Saturday, Zadjali said. Oman, where inflation almost hit 6 percent in July, its fastest pace this year, sets its interest rates in a weekly auction.
Gulf Arab central bankers agreed at a meeting this month to develop separate policies to tackle inflation, giving them greater freedom to set interest rates.
Kuwait left the benchmark discount rate unchanged at 6.25 percent. “The discount rate is unchanged for the moment because the central bank wants to keep a tight lid on the growth in credit,” said Randa Azar-Khoury, chief economist at National Bank of Kuwait.
Money supply in Kuwait, an indicator of future inflation, rose in August at the second-fastest pace this year, near a 13-year high.