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Thu 9 Oct 2008 12:27 PM

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Bahrain lowers key rates

UPDATE 1: Central bank tracks cuts by world's top central banks after global crisis unsettled markets.

Bahrain, which pegs its dinar to the dollar, lowered its key interest rates on Thursday, tracking cuts by central banks around the world seeking to mitigate a global financial crisis that has sent markets into turmoil.

Gulf Arab stock markets tumbled this week and interbank rates rose amid tightening liquidity as investors feared that the crisis had reached the world's top oil-exporting region. Bahrain cut its one-week deposit rate and overnight lending rate by 25 basis points and its repurchase rate by 50 basis points on Thursday.

The Gulf Arab state reduced the one-week deposit rate to 1.75 percent from 2 percent and cut its overnight deposit rate to 1.25 percent from 1.5 percent, the central bank said. It cut its overnight repurchase rate and overnight secured rate to 4.75 from 5.25 percent.

The cuts came a day after Kuwait slashed its key discount interest rate by 125 basis points, and the United Arab Emirates reduced it by a more modest 50 basis points.

"It will improve sentiment but the market, in line with the region, probably needs a bit more than that," said Shakeel Sarwar Butt, head of asset management at Bahrain-based SICO.

"More important is liquidity, the central bank needs to provide that now," he said.

Central banks around the booming Gulf Arab region have repeatedly said that their financial systems were safe as their banks had limited exposure to troubled Western companies and economies.

But Saudi Arabia, the world's biggest oil exporter, said on Wednesday that it had yet to use several instruments at its disposal including repurchase rate moves. Kuwait increased the loan to deposit ratio for banks to 85 percent from 80 percent on Wednesday to help boost liquidity, bankers said, but Butt did not expect a similar move by Bahrain.

The Bahrain benchmark traded 2.4 percent higher at 2,322 after the central bank announced the rate cut. It has lost 14 percent since June. Dollar pegs compel Gulf Arab states, except Kuwait, to track the US Federal Reserve to maintain the relative value of their currencies despite rising inflation in the booming region.

But a recovering US dollar and easing oil prices have reduced some of the pressure. The Fed on Wednesday cut its key federal funds rate by 50 basis points to 1.5 points in a coordinated move with the European Central Bank (ECB) and Britain, Canada, Sweden and Switzerland.

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