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Kuwait to trim interest rates by Feb

Kuwait's central bank is expected to trim the benchmark discount rate by at least 25 basis points by the end of February to tackle a record gap between key rates, the head of the country's economists' associations said.

Rola Dashti, the chairwoman of the Kuwait Economic Society (KES), also called on the government to open up the economy and intensify efforts to fight spiralling inflation, which hit a record 6.2% in September.
"I expect a discount rate cut in the coming two months," said Dashti in an interview conducted on December 31, adding that the central bank might "easily" cut the benchmark 25 basis points.

"He [the central bank governor] will have to lower the discount rate, whether he likes it or not," said Dashti, whose association keeps close watch of the Gulf Arab state's economy.

The central bank has kept the benchmark discount rate - used by banks to set lending rates - stable at 6.25% since July 2006 to restrain credit growth and fight inflation.

The central bank, which dropped a dollar-peg of its dinar currency in May to track a currency basket, has followed two US Federal Reserve rate cuts since September 18 by slashing its repurchase rate without changing the discount rate.

Cuts in the repo rate, used by banks to set deposit rates, brought it down to 4.5% - the widest gap to the discount rate since 1991, according to National Bank of Kuwait (NBK).

Dashti said the central bank did not cut the discount rate in view of recent calls by lawmakers that the government bails out indebted citizens by buying banks' consumer loans portfolios, estimated at 4 billion dinars ($14.64 billion).

The government has managed to fend off a massive private debt write off by setting up a fund worth 300 million dinars to help citizens struggling with debt repayment.

"He [the governor] did not take action at that point because it might have been seen to be reacting to political pressure," said Dashti. "My reading is that the central bank has [only] delayed its decision."

Dashti said the government should help the central bank fight inflation by opening up the economy and deregulating sectors dominated by the state such as the oil industries, public utilities and telecommunications as the state is still the sole owner of fixed-line telephone services.

"The burden should not be alone on the central bank tackling inflation. The monetary policy has to be accompanied by a prudent fiscal policy," she said.

"We say open up this economy," said Dashti, adding that allowing the private sector to take part in state-dominated sectors would absorb liquidity.

Dashti said the state should also sell land it owns to curb rises in price of property, one of the main contributors to inflation.

In its latest assessment of the Kuwait economy, KES criticised the government performance in 2007 as the country's budget was now more oil-dependent than it was 10 ten years ago. (Reuters)

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