RIYADH/DUBAI: Saudi Arabia and the United Arab Emirates slashed interest rates yesterday in the Gulf region’s latest move to ward off a sharp slowdown in economic growth as it becomes more entangled in global financial turmoil.
Most states in the oil-exporting Gulf Arab region peg their currencies to the US dollar, but have kept interest rates above Federal Reserve rates, which were cut to near-zero last month. In moves that bridge this gap, the Saudi Arabian Monetary Agency (SAMA) yesterday reduced its benchmark repurchase rate for the fifth time since October to 2 percent, while cutting a rate that guides deposits by half to 0.75 percent.
The UAE central bank — which refrained from matching the last two Fed cuts — reduced its benchmark by 50 basis points to 1 percent.
“The objective is to encourage banks to lend more to the private sector, which relies on government spending, now pressured by lower oil prices,” said John Sfakianakis, chief economist at SABB bank, HSBC’s Saudi affiliate.
Both central banks said they wanted to shore up domestic economies and encourage banks to extend cheap credit to corporate customers.
Gulf states that were struggling to keep decades-high inflation in check just months ago are now striving to avoid recession as an oil price slump dims economic growth prospects and tight credit markets discourage corporate borrowing.
“With the slowdown in the world economy and the fall in inflationary pressures, a rate cut at this juncture will support domestic economic activity and foster business confidence,” the UAE central bank said in a statement.
Inflationary pressures are easing across the world’s biggest oil-exporting region.
Data this week showed Saudi Arabian inflation eased to 9 percent in December after crossing a three-decade peak above 11 percent earlier this year, while money supply growth in the UAE fell to its lowest rate in more than a year.
“These measures should help to ensure that credit is available to genuine corporate demand at lower rates,” SAMA said of its rate cuts. The global downturn and tight credit conditions have already prompted private investors to rethink their regional investment plans.