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Thu 18 Dec 2008 11:53 AM

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Bahrain slashes interest rates

Gulf state's central bank cuts rates by 75 basis points as it mirrors move by the US Federal Reserve.

Bahrain cut key deposit and lending rates on Thursday by 75 basis points as it sought to improve money market conditions in the sharpest response by a Gulf oil producer this week to a deep US interest rate cut.

The island kingdom, which pegs its dinar currency to the dollar, lowered the overnight repurchase rate and overnight secured rate, its policy lending rates, to 2.75 percent from 3.5 percent.

Saudi Arabia and Kuwait reduced their benchmark lending rates by 50 basis points this week after the Federal Reserve chopped interest rates to between zero and 0.25 percent.

"The adjustment to the deposit and lending rates represents a continuation of measures taken by the central bank to ensure the smooth functioning of the money markets in Bahrain," the central bank said in a statement.

It said the move was taken in accordance with the demand of its fixed exchange rate regime, which has compelled most Gulf states maintaining dollar pegs to mirror the Fed closely.

"The central bank continues to monitor global and local market developments closely and will consider additional measures to ensure the normal functioning of Bahraini markets should the circumstances require," it said.

Like Saudi Arabia, which reduced its deposit rate for the first time in more than seven months this week, Bahrain lowered its one-week deposit rate to 0.75 percent from 1.5 percent and its overnight deposit rate to 0.25 percent from 1 percent.

Global financial turmoil has put the brakes on a regional oil-fuelled economic boom, and has discouraged private investors from taking loans to participate in public-private expansion projects because of the high cost of funding.

Oil prices have slumped by more than $100 since hitting a record above $147 a barrel in July.

Rate cuts in Saudi Arabia, Kuwait and Bahrain have eased pressure on money markets. Bahrain's three-month interbank rates have fallen almost 70 basis points in the last two months as the Gulf state cut its main lending rates by 250 basis points in total.

The three-month rate was 3.4 percent on Monday, the last trading day before a two-day holiday.

Not all Gulf states have reduced rates, however.

The UAE central bank refrained this week from tracking the Fed for the second time in less than two months. High UAE interbank rates have barely reacted to government and central bank measures to defrost money markets.

Qatar, which is closed for a national holiday on Thursday, held off reducing rates following two Fed cuts in October and made no change to its rates on Wednesday. (Reuters)