Gulf likely to cut rates, pressure on currencies mounts

(Getty Images)

Gulf Arab states will likely cut interest rates if the US Federal Reserve reduces its benchmark rate as expected this week, an economist said on Monday, adding to pressure on them to depeg their currencies from the plummeting dollar.

Mary Nicola, an economist with Standard Chartered, predicted the six GCC member states will follow any cut by the Fed, forecasting the US will reduce interest rates by 25 basis points.

However, Nicola said the best thing Gulf countries could do is follow Kuwait's lead and decouple their currencies from the dollar, which on Monday morning hit yet another record low against the euro on speculation over the announcement of a cut in US rates then the Fed meets on Wednesday.

"GCC countries are caught in a bit of a quandary. You want to lower rates to stimulate the economy, but the Gulf states are already running record high inflation and have a wealth of liquidity," Nicola told ArabianBusiness.com.

"The best thing to do would be for the rest of the GCC countries to follow [Kuwait's] suit, although that is not likely."

Kuwait abandoned its peg to the dollar in May, saying the US currency's weakness was fuelling inflation by making imports more expensive.

The UAE, Saudi Arabia, Qatar, Oman and Bahrain will be under pressure to follow any US rate cut to maintain the relative value of their dollar-pegged currencies, however this limits their ability to fight inflation, which has surged to record highs across the Gulf over the past last year.

A cut in Gulf interest rates will be good news for homeowners as the interest paid on mortgages will go down. However, the continued fall in the dollar is yet further bad news for expatriates sending money home, many of whom have seen the relative value of their earnings significantly reduced.

Last month Kuwait, the UAE and Qatar followed the US in reducing interest rates after the Fed slashed its benchmark rate for the first time in more than four years. Saudi Arabia, Oman and Bahrain declined to cut interest rates.

Print | Email | Discuss this article

| Share |

READERS' COMMENTS

Click here to post a comment

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic. Arabian Business would like to point out that only comments relevant to the story will be published. Any containing personal insults or inappropriate language will not be approved.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Enter the words above *
Please click post only once - your comment will not be published immediately.

MORE FROM ARABIANBUSINESS.COM