Gulf central banks follow Fed and raise interest rates

Gulf central banks follow Fed and raise interest rates
Federal Reserve Chair Jerome Powell speaks to the media after the Federal Open Market Committee meeting, Wednesday, June 13, 2018, in Washington. (AP)
Updated 14 June 2018

Gulf central banks follow Fed and raise interest rates

Gulf central banks follow Fed and raise interest rates

LONDON: Most Gulf central banks hiked their benchmark interest rates by a quarter of a percent in response to Wednesday’s decision by the US Federal Reserve to raise rates for the second time this year, with another two expected before end-December to keep the lid on a fast-expanding US economy.
A UAE central bank statement said: “(We) will raise interest rates applied to the issuance of certificates of deposits in line with the increase in interest rates on the US dollar.
The repo rate applicable to borrowing short-term liquidity from the central bank against certificates of deposits was also increased by 25 basis points to 2.25 percent. The Saudi Arabian Monetary Authority increased its repo rate, at which it lends to banks, by a quarter point to 2.5 percent.
In the Gulf, Kuwait alone left its discount rate unchanged at 3 percent.
Central banks in the region, which peg their currencies to the dollar — with the exception of Kuwait — had been expected to follow the US, as is usually the case.
“It looks like the Fed will put up rates a bit more than investors were expecting,” said Jason Turvey, economist at Capital Economics in London.
“But in the Gulf, we are not expecting capital outflows as sovereign balance sheets are relatively strong, and this is an environment where oil prices have been rising, allowing governments to ease up on austerity.”
The Federal Open Market Committee raised the target range for the federal funds rate from 1.75 to 2 percent on Wednesday, in the seventh increase of the current cycle and the second this year. Fed policy makers have indicated four raises in 2018 and two in 2019.
The Fed dropped previous crisis-era assurances that it would keep rates below their longer-run norms, indicating a more hawkish stand.
In another major move, the European Central Bank said it would phase out its unprecedented €2.4 trillion bond-buying program by the close this year’s, its biggest step in dismantling crisis-era stimulus a decade after the start of the euro zone’s economic downturn.
“The ECB will halve the size of monthly asset purchases to €15 billion after September and phase them out entirely after the end of the year,” said the Financial Times.
But the ECB does not envisage raising interest rates any time soon, it was reported.