JEDDAH, 1 February 2008 — The central banks of Gulf countries lowered their deposit rates yesterday to deter pressure on their dollar-pegged currencies and left lending rates unchanged to avoid stoking near-record inflation.

The move came after the US Federal Reserve on Wednesday cut by a half-percentage point its interest rate, the second in over two weeks, in an effort to stop a sharp economic slowdown.

Saudi Arabia, Qatar and Bahrain matched the Fed’s cut by lowering their main deposit rates to three percent, in line with the US benchmark.

The UAE and Kuwait (the only Gulf state whose currency is not pegged to the dollar), each lowered their repurchase rates by 50 basis points to three percent and 3.5 percent, respectively, yesterday. The UAE’s repo, created in November, sets the rate at which banks borrow money from the central bank, but is not used widely by banks to set their own lending and deposit rates.

Kuwait left its benchmark discount rate unchanged at 5.75 percent, having cut it for the first time in 18 months last week following a Fed move.

Qatar, the world’s largest exporter of liquefied natural gas, dropped its deposit-facility rate by 50 basis points to three percent but left its lending rate unchanged at 5.5 percent.

Bahrain made a similar cut and left lending rates unchanged at 5.25 percent.

Oman sets its interest rates at a weekly auction of certificates of deposit every Monday. It cut its repo rate by 61 points effective Wednesday, following last week’s 75 basis-point emergency cut in the US.

“The move is a continuation of efforts that are taking place over the past two months to control the supply of money and contain the further speculation on revaluation of Saudi riyal and the currencies of other GCC member countries that are pegged to the dollar,” John Sfakianakis, chief economist at SABB, told Arab News yesterday.

Forward prices showed investors betting on appreciations of 1.2 percent, 1.6 percent and 2.5 percent in the Qatari, Saudi and Emirati currencies in a year.

“It is a concerted effort in GCC countries (Kuwait, Qatar, Bahrain, the UAE, Oman and Saudi Arabia) to try to contain money supply, a rise in inflation and speculations on regional currency revaluation,” he added.

He further said that should recessionary signs in the US economy “prevail, there is no choice on the part of the US Federal Reserve but to further lower its interest rates” and for the GCC central banks to toe the line by “lowering the reverse repo rate while keeping the repo rate higher” to control lending and curb inflation.

“It makes sense to follow the move of the US central bank so that it will not put pressure on exchange rates,” said Brad Bourland, chief economist and head of research at Riyadh-based Jadwa Investment.

Hoping to rein in credit growth, Saudi Arabia, Bahrain, Qatar and Oman have raised reserve requirements after previous Fed cuts, despite that lending rates to retail customers have held steady in the region where banks are the main beneficiaries of a growing spread between money-market rates and official lending rates.

The average consumer doesn’t really get affected because the borrowing rates do not match the fluctuations of interest rates in the region, Sfakianakis added.

The Gulf countries, whose economies have surged on a near five-fold rise in oil prices since 2002, are trying to avoid making credit cheaper amid rising inflation, spurred by rising rents and imported food costs.

Saudi Arabia, which has not changed the value of its currency against the dollar in 22 years, left its repurchase rate — which guides lending rates — at 5.5 percent. Saudi inflation rose to a 16-year high of 6.5 percent in December.

Instead, it lowered its reverse repo rate — which guides bank deposit rates — by 50 basis points to three percent.

The reverse repo has fallen two percentage points after five US Fed moves since Sept. 18. The total Fed cut since September is 2.25 percentage points.

A repo rate is a discount rate at which a central bank repurchases government securities from the commercial banks, depending on the level of money supply it decides to maintain in the country’s monetary system. To temporarily expand the money supply, the central bank decreases repo rates (so that banks can swap their holdings of government securities for cash). To contract the money supply, it increases the repo rates.

Reverse repo is the same transaction from the borrowers perspective.

Monica Malik, Middle East economist at Egyptian investment bank EFG-Hermes, however, said “interbank rates are much lower than official rates so the effect of these rate cuts are negligible.”

“Real interest rates have been negative for quite some time so credit growth is already high,” she added.

Jason Goff, head of treasury sales at Emirates Bank International Ltd, noted that corporate lending rates in the UAE will probably drop because banks base them on the Emirates Interbank Offered Rate, which tracks the Fed. “These rate cuts have been great for corporates in a rising cost environment,” he said.