Other Gulf states follow US rate rise
KUWAIT: The Central Bank of Kuwait (CBK) decided yesterday to keep the discount rate unchanged at 2.75 percent. Meanwhile, the Gulf’s dollar-pegged economies followed a US interest rate hike to maintain the value of their currencies but at the risk of denting efforts to stimulate their flagging economies. Saudi Arabia, the United Arab Emirates, Qatar and Bahrain all raised their key benchmark interest rates by 25 basis points after the move by the US Federal Reserve late on Wednesday. Kuwait, whose dinar is pegged to a broader basket of currencies, is battling to boost its economy, which is forecast by the International Monetary Fund to shrink by 2.1 percent this year.
On the basis of a thorough study of latest data, the CBK’s board of directors maintained the discount rate at current level to enhance the atmosphere of economic recovery and the attractiveness and competitiveness of the national currency, the CBK said in a press release. The Central Bank continues to use the available means of the monetary policy with a view affirming the status of the national currency as a credible and profitable facility for local savings, it said.
As part of the regular surveys of the economic, fiscal and banking trends, the outlook of the interest rates on major currencies, notably the US dollar, and the recent decision of the US Federal Reserve Board of Governors, the CBK decided to keep the discount rate unchanged at 2.75 percent, the statement affirmed. The CBK is keen on boosting the non-inflationary recovery in the non-oil economic sectors and maintaining the fundamentals of its fiscal policy, Governor Dr Mohammad Al-Hashel said.
Recent data show that the local banks are able to accommodate to the CBK measures, notably those relating to ratcheting up the interest rates on KD deposits under the ceiling of the interest rates on loans of these banks’ as per the current discount rate, he noted. The local banks are vying for borrowers under the low credit rates and the modest growth rates of the non-oil sector, Hashel pointed out. The CBK governor recalled the last decision on June 14 to keep the discount rate unchanged while the Federal Reserve Bank decided at the same time to increase the interest rate.
There was need to enhance the KD’s competitive edge as an attractive facility for local savings and boost the local credit growth, he added. Hashel reaffirmed the CBK’s commitment to monitor the latest economic, fiscal and banking developments and take the necessary measures to bolster up the economic recovery.
The Saudi central bank said it was raising one of its benchmark rates to 1.5 percent although that was counterbalanced by a government announcement of $19.2 billion in stimulus funds for the private sector. The kingdom reported a negative inflation rate in October and economic forecasts say the region’s largest economy is likely to shrink this year. The United Arab Emirates central bank raised its benchmark short-term borrowing rate to 1.5 percent while Bahrain raised its key rate to 1.75 percent and Qatar raised its to 2.5 percent. There was no immediate word from Oman.
Raising interest rates is a tool normally used to cool heating economies and check inflation but the Gulf states are suffering from the reverse problem – economic contraction and deflation. Gulf oil exporters have been hit hard by the slump in world prices for crude, which provided a major part of their finances. Huge budget deficits have forced them to cut public spending and seek to restructure their economies away from oil. They have all been keen to boost lending to expand their private sectors. – Agencies