Gulf central banks largely move in lockstep with the US to protect their currencies' pegs to the dollar
Policy makers in the Gulf followed the US Federal Reserve’s emergency move on Tuesday, lowering interest rates in response to the coronavirus outbreak.
Central banks in Saudi Arabia, the United Arab Emirates and Bahrain matched the Fed’s half-percentage point cut, hours after Chairman Jerome Powell said the fallout from the virus had increased risks to the US economic outlook.
Gulf central banks largely move in lockstep with the US to protect their currencies’ pegs to the dollar.
The Fed’s decision came after Powell and finance chiefs from the Group of Seven nations said they would “use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.”
“The interest rate cut is a helpful gift from the Fed. But the main questions for growth this year are whether a prolonged outbreak of the virus will disrupt major events in the region, such as the pilgrimage season in Saudi Arabia and Expo 2020 in the UAE, and whether the withdrawal of the fiscal stimulus will go ahead as planned,” said Ziad Daoud, economist.
Disruptions to trade, tourism and supply chains are blindsiding the oil-rich Gulf, which already faces the prospect of lower crude prices if the health emergency continues to pummel energy demand.
Commodity exporters are especially exposed to trade with China, where the outbreak has crippled production and consumption, as factories remain below capacity and transport is curtailed.
Business conditions in the UAE and Saudi Arabia have already taken a turn for the worse. The spillovers resulted in “a sharp loss of momentum since the start of 2020” for Saudi Arabia’s non-oil private sector, according to IHS Markit.
The question now is whether regional governments will also move to enact fiscal stimulus. While a looser stance by central banks will provide some relief, fiscal spending can pack a more powerful punch in the Gulf.
Bank margins in the region will probably react to the 50 basis-point cut before the second half of the year, according to Bloomberg Intelligence analyst Edmond Christou.
“This has a bigger impact in 2020, as 2019 cuts were spread out over time,” he said.