UAE bank bows to Fed pressure

(Getty Images)

The UAE was the first dollar-pegged Gulf Arab oil producer on Thursday to match the seventh US interest rate cut since September as Gulf states grapple with near-record inflation.

Dollar pegs in all Gulf states but Kuwait compel their respective central banks to track the Federal Reserve to maintain the relative value of their currencies, even though inflation is spiralling and their economies are booming.

The UAE, the second-largest Arab economy, reduced its over-night repurchase rate by 25 basis points to 2% on Thursday, the central bank said, keeping the rate on par with the Federal Reserve's Fed Funds rate.

Kuwait, which severed its link to the ailing greenback last May to fight inflation, kept its interest rates - including its benchmark discount rate - unchanged as of 0555 GMT.

Saudi Arabia and Qatar were expected to make interest rate decisions later in the day, while Bahrain's central bank is closed on Thursday for a Labour Day holiday. Oman sets interest rates at a weekly auction on Mondays.

The UAE repo, introduced in November, is the Gulf state's benchmark and sets the rate at which banks borrow funds from the central bank.

With interbank rates lower than the repo rate - the three-month Emirates Interbank Offered Rate (EIBOR) was 1.92% at 0550 GMT - most banks have no reason to borrow from the central bank.

The Fed has slashed rates seven times by a total of 3.25% since September 18.

Inflation is accelerating across the Gulf, almost doubling in the six months to March to 9.6% in Saudi Arabia, the highest since at least the oil boom of the 1970s.

UAE inflation hit a 19-year peak of 9.3% in 2006 and probably accelerated to 10.9% last year, according to an estimate by the National Bank of Abu Dhabi. (Reuters)

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