Following the US Federal Reserve's decision to hike interest rates by 25 basis points, the UAE, Saudi Arabia and Bahrain said they were also raising their interest rates. Kuwait said its interest rate remains unchanged.
Saudi Arabia’s central bank said it was raising its reverse repo rate by 25 basis points to 1.50 per cent. The bank said it was keeping its repo rate, used to lend money to banks, unchanged at 2.00 per cent.
A similar decision by the UAE saw the repo rate for borrowing short-term liquidity from the central bank against certificates of deposit uncreased by 25 bps to 1.75 per cent.
Bahrain’s central bank also said it was raising its key interest rate by 25 basis points. The central bank’s key policy interest rate on the one-week deposit facility was raised to 1.75 percent from 1.50 percent.
Kuwait’s central bank, on the other hand, kept its key interest rate unchanged, citing the need to boost economic growth.
Qatar was expected to follow suit, and Oman has been raising its rates gradually.
Kuwait, which manages its dinar currency against a US dollar-dominated basket of currencies, imitated the Fed immediately after three US rate hikes that started in December 2015.
But in June this year it kept its discount rate flat even though the Fed tightened policy again, and after the latest US hike was announced on Wednesday, Kuwait again decided to leave its rate unchanged.
“The central bank left the discount rate unchanged at 2.75 per cent to consolidate an atmosphere conducive to the recovery of economic growth rates,” Kuwait's central bank said in a statement.
Kuwait’s economy is expected to shrink 2.1 per cent this year, according to the IMF. Although that is largely because of a cut in oil output under a global agreement among producers to restrain production, it also reflects a sluggish private sector.
Commercial bankers believe improving liquidity in Kuwait’s banking system caused by higher oil prices has also persuaded the central bank to be less aggressive about raising interest rates.
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Kuwait’s central bank governor, Mohammad al-Hashel, said in October that he looked at two key factors when making interest rate decisions: 1) Kuwaiti banks’ interest rate margins; and 2) dinar deposit rate spreads with the US dollar deposits.
On Wednesday, the central bank said its policy decision was based partly on the ability of local banks to absorb any effort to raise interest rates on their dinar deposits.
Editor's note: The article has been adapted from its original source and includes input from Reuters.
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