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Wed 30 May 2007 12:51 AM

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Kuwait eases pressure on money market

Kuwait is allowing banks to reinvest some funds in short term certificates as they mature.

Kuwait is allowing banks to reinvest some funds in short-term central bank certificates that it stopped selling on Sunday to deter bets on an appreciation of the dinar currency, a central bank official said on Tuesday.

The certificate is used to set the one-month intervention rate at which banks invest surplus funds with the central bank. The suspension in sales pushed down interest rates on the money market at a time when the central bank says it is concerned about inflation.

The central bank is allowing banks to reinvest, or rollover, some funds in one-month certificates as they mature, said the central bank official, who did not want to be identified.

"Sometimes they roll over, sometimes they don't. It depends on the day," said the official, who could not comment on the reasoning behind the policy.

Standard Chartered Bank said concerns about inflation were likely to have been a factor.

"The decision to effectively push down interest rates at a time when the concern expressed is about inflation is inconsistent, and therefore the move was likely to be temporary," Steve Brice, the bank's regional head of research, said in a note.

The central bank cited rising inflation, caused by more expensive imports, as the main reason for its decision to drop the dinar's peg to the weak U.S. dollar this month and adopt a basket of currencies.

That allowed the dinar to appreciate 0.37 percent against the U.S. currency, which hit a record low against the euro in April.

The central bank has held the dinar at $0.28806 since the May 20 policy shift despite market speculation that the appreciation was the first of many moves.

The central bank decision to close its short-term borrowing window flooded the money market with dinars as banks sought to invest their surplus funds with each other.

The one-month Kuwait interbank offered rate tumbled from 5.1875 % on Saturday to 4.1250 %on Tuesday.

Allowing some banks to reinvest short-term funds would mitigate the impact of the suspension, Brice said in the note.

"If true, this decision should bring rough normality back to the market, while discouraging excessive inflows into the dinar," he said.

"The central bank will not mop up additional liquidity, but will continue to sterilise inflows to the degree that it has in the past."

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