KUWAIT: Energy-rich Gulf states Saudi Arabia, Kuwait and Bahrain raised their interest rates Wednesday after a landmark decision by the US Federal Reserve to hike its rates.
The move by the Gulf countries came despite the sharp decline in oil prices and forecasts of a sluggish economic growth. The world’s top oil exporter Saudi Arabia raised its overnight reverse Repo rate by 25 basis points to 50 basis points but left its benchmark Repo rate unchanged at 2.0 percent, the official SPA news agency reported.
The Saudi Arabian Monetary Agency, or the central bank, said the decision was taken in light of developments in local and international financial markets. The decision is effective immediately. The Central Bank of Kuwait said it had decided to raise its benchmark discount rate by 25 basis points to 2.25 percent.
Governor Mohammad Al-Hashel said the increase is to ensure the “competitiveness of the national currency”, and support the national economy, the official KUNA news agency reported.
It became effective from yesterday. Bahrain also raised its overnight interest rate by 25 basis points to 0.5 percent and its rate for one week by a similar value to 0.75 percent, the Bahrain News Agency reported.
The kingdom however kept Repo rate unchanged at 2.25 percent. The three countries are members of the six-nation Gulf Cooperation Council (GCC) alliance. Other members are Qatar, United Arab Emirates and Oman.
All the GCC states except Kuwait peg their currencies to the US dollar and have normally followed US decisions on interest rates. Kuwait links its dinar to a basket of major currencies, the composition of which is kept confidential, but it is believed that the greenback accounts for more than 70 percent of its weight.
Earlier Wednesday, the Fed raised the benchmark federal funds rate by a quarter point to 0.25-0.50 percent, its first interest rate hike in more than nine years, saying the economy was growing at a moderate pace and should accelerate next year.
The subsequent rate decisions of the GCC states came despite the sharp decline in the price of oil which contributes to over 90 percent of public revenues. The International Monetary Fund has cut its projections on economic growth for GCC states and forecast that all six nations will end up this year with a budget deficit.
Oil prices have continued their recent decline, falling by around 60 percent since mid-2014. IMF has projected the GCC states would lose around $275 billion in revenues as a result.
The Fed move, which has repercussions across the global financial system, also imprinted Janet Yellen’s personal stamp on US monetary policy after nearly two years as Fed chair spent plotting to reverse course from the easy-money stance bequeathed by predecessor Ben Bernanke.
The Fed raised its benchmark federal funds rate, locked near zero since the financial crisis, by a quarter point to 0.25-0.50 percent, saying the world’s biggest economy is growing solidly and should accelerate next year to a respectable 2.4 percent pace. “This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression,” Yellen said.
“It also recognizes the considerable progress that has been made toward restoring jobs, raising incomes, and easing the economic hardship of millions of Americans.”
The move was widely expected and marked the end of an era in which the Fed pumped trillions of cheap dollars into the devastated US economy to fuel what turned out to be an unexpectedly long rebound.
It kicks off a likely series of rate increases which the Federal Open Market Committee, the Fed’s policy board, promised would be “gradual” and follow the pace of the economy.
FOMC projections showed they expect the rate will rise to about 1.4 percent by the end of 2016, suggesting four more increases over the coming 12 months. “The important question is how far, how fast,” said economist Edwin Truman at the Peterson Institute for International Economics.
Markets react positively
The announcement, and the Fed’s positive outlook for US growth, pushed Asian and US stocks higher, with the S&P 500 finishing with a 1.5 percent gain, most of which came after the Fed’s announcement. Stocks in Australia, Tokyo and Hong Kong were all up, and the dollar rose slightly against the euro. The rate increase came amid some criticism from prominent economists that the economy was still vulnerable to slower global growth and that there was no compelling reason-like surging inflation and a tight jobs market-to justify it. But FOMC support for the decision was unanimous. The committee pointed to “considerable” improvement in the labor market and said it is “reasonably confident” in inflation rising over the medium term, to its two percent objective.
“The first thing that Americans should realize is that the Fed’s decision today reflects our confidence in the US economy,” Yellen told a press conference.
“While things may be uneven across regions of the country, and different industrial sectors, we see an economy that is on a path of sustainable improvement.”
Yellen predicted the challenges of ultra-low inflation and continued slack in the labor market would both diminish significantly over the coming year. — AFP