Gulf states toe Fed's line, cut rates

FOLLOWING SUIT: Gulf central banks slashed rates again, following the US Federal Reserve's lead, despite soaring regional inflation. (Getty Images)

Several Gulf States cut interest rates on Thursday in line with a reduction in the US as they sought to ward off currency speculation while tackling inflation at near-record peaks.

Dollar pegs in all Gulf states bar 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 overnight repurchase rate by 25 basis points to 2%, keeping the rate the same as the Federal Reserve's Fed Funds rate.

RELATED: UAE staying pegged - officials

Qatar continued with a trend of only cutting its deposit rate, also to 2%, while leaving its benchmark lending rate unchanged at 5.5% to prevent lower borrowing costs from stoking inflation - already at a near-record 13.7%.

"Even though speculation on Gulf currency revaluations has come off since the beginning of April, Gulf countries don't want it to come back again," said Monica Malik, the regional economist at Cairo-based investment bank EFG-Hermes.

Bahrain acted similarly, lowering its one-week deposit rate by 25 basis points and leaving its lending rates on hold. The one-week deposit rate was lowered to 2% from 2.25% and its overnight deposit rate to 1.5% from 1.75%.

Investors had piled into Gulf currencies beginning late last year on speculation some states in the world's biggest oil-exporting region would sever their links to a US currency tumbling to record troughs against the euro.

That speculation has died down since Gulf central bankers decided at a meeting in Doha to get a monetary union project back on track to avert unilateral currency revaluations.

Kuwait, which severed its link to the ailing greenback last May to fight inflation, had not made any announcement about rates by 0650 GMT.

Saudi Arabia is due to have an interest rate policy meeting later on Thursday. Oman sets interest rates at a weekly auction on Mondays.

Gulf central banks, meanwhile, could get some relief later this year after the Fed hinted it's seventh move since September could be the last in a series meant to buffer the economy from a credit crunch and housing downturn. The Fed has slashed rates seven times by a total of 3.25% since September 18.

"The Fed looks likely to be coming to the end of its easing cycle and that will be very welcome for Gulf policymakers whose main concern remains inflation," Malik said.

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.

RELATED: Gulf inflation risks accelerating to 8%

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.

But the pass-through effect of central bank rate cuts is minimal. 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 0650 GMT - most banks have no reason to borrow from the central bank. (Reuters)

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