Font Size

- Aa +

Mon 8 Feb 2010 08:53 PM

Font Size

- Aa +

Kuwait cbank cuts repo rate to help fund development

Cut to encourage banks to lend more instead of holding back excess reserves.

Kuwait's central bank followed Sunday's cut in its benchmark discount rate by reducing two of its repurchase rates by 25 basis points on Monday, and analysts said the move was aimed at helping to fund development.The cut is expected to encourage banks to lend more and the private sector to take part in financing a four year development plan, analysts said.

Speaking to Reuters, Randa Azar Khoury, Group Chief Economist, National Bank of Kuwait, said: "The repo cut should theoretically encourage banks to lend more rather than hold onto excess reserves because they would earn on such reserves."

She added: "In essence, this is what you'd call accommodative monetary policy, ie: accommodate the fiscal stimulus that the government will be launching."

The central bank reduced its one week repo rate to 1.5 percent from 1.75 percent and its one month rate to 2 percent from 2.25 percent, official data showed.

It left its overnight repo rate unchanged at 0.75 percent.

Kuwait, the only Gulf state that does not peg its currency to the US dollar, revamped monetary policy tools in 2009 by introducing new repurchase agreements to give banks more access to short term funding.

Earlier this month, parliament passed a $104 billion four year development plan with the aim of reducing its dependence on oil and stimulating private sector participation in projects.

The plan, the government's first since 1986, includes the establishment of five public shareholding firms.

On Sunday the central bank cut its key discount rate by 50 basis points to 2.5 percent to support growth as inflation is seen staying low.

It has cut its key rate by 200 basis points since October 2008. The last cut, of 50 basis points, was made in May 2009.

Repo agreements allow banks to borrow funds from the central bank.

Kuwaiti analyst Ali al Nemash said the cut will encourage the private sector to help finance the government's development plan and also allows it to reschedule its debt at lower interest rates and to clean up its balance sheet.

He said: "It's good, it will help to finance the development plan which will be partly financed by the private sector."

Ratings agency Moody's said the plan could boost domestic banks and the construction sector but its implementation remains in question because the country's "cumbersome bureaucracy has prevented authorities from meeting much lower spending targets." (Reuters)

For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.