DUBAI,13 December 2007 — Gulf states moved to deter bets on the appreciation of their dollar-pegged currencies, with some member deciding to slash their key rates following the US Federal Reserve’s move yesterday to trim its federal funds rate by a quarter percentage point to 4.25 percent.
Saudi Arabia, United Arab Emirates and Bahrain matched Tuesday’s 25 basis point US Federal Reserve rate to ensure investors in their dollar-pegged currencies would not benefit from higher returns than they would get in US deposits.
The Saudi and Bahraini central banks tried not to make credit cheaper. Saudi Arabia cut its reverse repurchase rate, which guides the return on bank deposits, but left the benchmark repo, the rate at which it lends to banks, unchanged. Bahrain too cut its deposit rate and left lending rates steady.
“This is a continuation of the policy of the governments to dissuade speculators from placing bets on a revaluation of the local currencies,” said John Sfakianakis, chief economist at SABB bank, HSBC’s Saudi affiliate. “They will not entertain pressure on their currencies,” he said.
The UAE took its overnight repurchase rate to 4.25 percent, exactly the same as the Fed benchmark. US consumer prices rose 3.5 percent in the year to end October whereas UAE inflation hit a 19-year high of 9.3 percent in 2006, the latest available figure.
“Rates are low any way you look at it,” said Giyas Gokkent, head of research at National Bank of Abu Dhabi. “You have booming credit growth and the various countries are trying to react the best way they can.”
Saudi Arabia’s central bank, which pegs its riyal to the dollar, reduced the reverse repurchase rate by 25 basis points on Tuesday after a US rate cut, but left its benchmark unchanged, two bankers said.
The Saudi Arabian Monetary Agency reduced the reverse repo rate to 4 percent from 4.25 percent and left the benchmark repurchase rate at 5.5 percent, the bankers in Saudi Arabia and Dubai said.
The United Arab Emirates, which pegs its dirham to the dollar, cut its overnight repurchase rate by 25 basis points to 4.25 percent yesterday after the US central bank’s move. The repo, introduced late last month, is now the UAE’s benchmark rate, a central bank official was quoted as saying last week.
Bahrain, which also pegs its currency to the US dollar, cut its benchmark one-week deposit rate by 25 basis points yesterday to 4 percent.
The Gulf Arab state also cut the overnight deposit rate to 3.5 percent from 3.75 percent. It left the overnight repurchase rate and the over-night secured rate unchanged at 5.25 percent.
Bahrain plans to move toward tracking the dollar-pegged dinar against a currency basket without changing the exchange rate, a local newspaper quoted the finance minister as telling the advisory Shoura council.
“In regards to delinking the peg and the trading of currencies, Bahrain will move toward a basket of currencies, and in the end nothing will change,” Sheikh Ahmed bin Mohammad Al-Khalifa said.
Bahrain’s central bank said on Monday it wants to limit banks’ exposure to the real estate market and proposed capping the value of the mortgages they can offer at 25 percent of total loans.
Banks would be able to finance up to 70 percent of the value of a property if the proposal is approved, the central bank said in a consultation paper posted on its website. It did not say whether there were limits now. “Limits are aimed at promoting best practice in banks’ exposure to real estate and the avoidance of over-concentration by banks in real estate exposure,” the central bank said. “There will be an aggregate credit concentration limit for real estate financing to individuals, corporations and contractors of 25 percent of the bank’s gross loan portfolio,” it said.
However, Qatar tightened bank lending curbs yesterday for the first time this decade as Gulf oil producers tried to respond to a US interest rate cut without piling pressure on their dollar pegs or stoking inflation.
Qatar’s central bank raised the reserve requirement by 50 basis points to 3.25 percent, forcing banks to keep more money in their vaults to prevent lower borrowing costs from fuelling inflation that is just below a record high of 15 percent.
Qatar was still deciding whether to follow the Fed, a central bank official said, asking not to be identified.
“We raised the reserve requirement by 50 basis points to 3.25 percent,” the official told Reuters.
All six oil producers preparing for monetary union as early as 2010 followed the last Fed cut on Oct. 31 by reducing some interest rates. Saudi Arabia and Bahrain declined to match a Sept. 18 easing, triggering market speculation of an imminent revaluation that drove the Saudi riyal to a 21-year high.
Kuwait, which broke ranks with its neighbors in May and severed its peg to the dollar, kept rates steady on Wednesday. Kuwait said inflation, which hit a record 6.2 percent in September, was the main reason it decided to track the dinar’s rate against a currency basket.
Kuwait kept the dinar reference rate unchanged on Wednesday as the dollar rose versus the euro after the US Federal Reserve reduced borrowing costs by less than some expected. The US currency eased against the yen.
The dinar will trade around a mid point of 0.27390 per dollar, unchanged from the previous day, the central bank said.
Kuwait left its benchmark and repurchase rates unchanged at 6.25 percent and 4.5 percent after the Fed cut.
Meanwhile, Jordan’s central bank has no plans to revalue its dinar currency or drop its peg to the US dollar, its central bank governor said yesterday.
“No. The system has been working very well,” Umayya Toukan told Reuters when whether he planned to revalue the dinar or sever the peg in response to dollar weakness. Jordan does not need to match US Federal Reserve rate cuts, Toukan said last week.