The Central Bank of the UAE (CBUAE) has decided to raise interest rates, following the US Federal Reserve’s biggest interest rate hike since 1994.
While announcing the interest rate hike, the chairman of the US Federal Reserve Jerome Powell admitted that the US central bank was attempting to curb inflation without causing a recession.
“We at the Fed understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so,” Powell said.
“My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation.”
GCC Central Banks follow Fed interest rate hike
Most Gulf central banks followed the US Federal Reserve on Wednesday, lifting their key interest rates by three-quarters of a percentage point, while Saudi Arabia made a smaller hike after the latest data showed inflation there slowing slightly.
GCC countries have their currencies pegged to the US dollar, except Kuwait.
The Saudi Central Bank lifted its repo and reverse repo rates by 50 basis points (bps) to 2.25 percent and 1.75 percent, respectively.
The Central Bank of Kuwait raised its discount rate by 25 bps to 2.25 percent. Its peg to a basket, the composition of which is undisclosed, gives it more room to diverge from Fed policy if domestic economic conditions call for that.
The UAE Central Bank increased the base rate applicable to overnight deposit facility (ODF) by 75 basis points, effective from Thursday, 16 June 2022, after the US Federal Reserve Board’s revealed its decision to increase the interest on reserve balances (IORB) by 75 basis points.
Attempt to curb inflation without causing a recession
Powell added that the US Federal Reserve cannot control all the factors driving inflation.
Due to the Russia-Ukraine crisis, oil prices have soared in 2022, hovering at approximately $110 per barrel, while the cost of commodities such as wheat have increased significantly.
“I think events of the last few months have raised the degree of difficulty, created great challenges,” Jerome Powell said.
“There’s a much bigger chance now that it’ll depend on factors that we don’t control. Fluctuations and spikes in commodity prices could wind up taking that option out of our hands.”
The CBUAE’s base rate, which is anchored to the US Federal Reserve’s IORB, signals the general stance of the central bank’s monetary policy. It also provides an effective interest rate floor for overnight money market rates.
Powell also pointed to the possibility of another rate hike following the next US Federal Reserve meeting in July.
An increasing number of economists are projecting a downturn in 2023 as the Fed struggles to get on top of inflation that’s running at its highest level in four decades, Bloomberg reported.
Nearly 70 percent of academic economists polled by the Financial Times and the University of Chicago foresee a contraction in gross domestic product (GDP) next year, according to a survey released on June 13.
Meanwhile, the rate applicable to borrowing short-term liquidity from the UAE central bank will be maintained through all standing credit facilities at 50 basis points above the base rate, the state-run news agency, Wam, confirmed.
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