Following the US Fed’s interest rate hike on Wednesday, the central banks in Saudi Arabia, Bahrain, United Arab Emirates and Qatar raised their key policy rates.
‘With the Fed expected to raise rates by another 25 basis points (bps) in September and a further 75bps in 2018, monetary conditions will continue to become tighter given the GCC authorities’ firm commitment to the peg,’ the Institute of International Finance (IFF) said in a report.
Fed officials on Wednesday agreed to raise their benchmark lending rate for the third time in six months, maintained their outlook for one more hike in 2017. The decision brings the Fed’s target for the federal funds rate, which covers overnight loans between banks, to a range of one per cent to 1.25 per cent.
The Saudi Arabia Monetary Authority raised its reverse repo rate to 1.25 per cent to maintain the attractiveness of riyal, but, wary of a slowing economy, kept its repo rate unchanged at two per cent, the IIF said.
The UAE hiked both rate on certificates of deposit and the repo rate, taking the latter to 1.5 per cent. Qatar’s central bank raised its deposit rate by 25bps to 1.5 per cent, but also kept its lending rate unchanged. Bahrain raised its one month deposit rate by a larger than expected 50bps to 2.15 per cent to attract capital inflows, while increasing other policy rates by 25bps.
Elsewhere in the region, the central bank in Kuwait kept its discount rate unchanged at 2.75 per cent, but indicated that it was monitoring developments to keep a balance between growth and maintaining the attractiveness of the dinar. The Central Bank of Oman has not announced any change in policy rate so far.
With cost of funding already high due to tight liquidity in the aftermath of the oil crash, the IIF said the monetary tightening will further raise the cost of borrowing in the GCC and translate to some deterioration in credit quality.
‘Despite these challenges, the authorities remain firmly committed to the exchange rate regime, seeing it as a linchpin
of financial stability, and we expect the pegs to remain for the foreseeable future’, the IIF said.
While monetary policy in the GCC is still accommodative, the IIF noted that monetary tightening comes at a difficult time with banks lending slowing down sharply.
‘Still grappling with the aftermath of the oil crash and the subsequent necessary fiscal adjustment, we are projecting GCC growth to be subdued at about two per cent in 2017, well below the long-term average of 4.5 per cent for the region’.
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