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Sun 30 Dec 2007 07:38 PM

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Kuwait set to cut lending rates

Central bank will likely reduce key discount rate soon despite record inflation, National Bank of Kuwait says.

The central bank of Kuwait is likely to cut its key discount rate soon despite inflationary pressures to bridge a widening gap between domestic interest rates, National Bank of Kuwait (NBK) said on Sunday.

The central bank, has kept the benchmark discount rate - used by banks to set lending rates - stable at 6.25% since July 2006 to restrain credit growth and fight inflation.

The central bank, which dropped the dinar currency's peg to the dollar in May to track a currency basket, has followed two US Federal Reserve rate cuts since September 18 by slashing its repurchase rate without changing the benchmark interest rate.

Cuts in the repo rate, used by banks to set deposit rates, brought it down to 4.50% - the widest gap to the discount rate since 1991, according to NBK.

But NBK, the country's biggest lender, said the central bank would soon have to lower the discount rate to reduce the spread with the repo rate as dollar rates were expected to fall further.

"We believe there is a limit for how long the central bank can sustain this policy without creating distortions in money markets," NBK said in its research report.

NBK said a discount rate cut would encourage investment in sectors which have contributed strongly to inflation in the Middle East's fourth-largest oil exporter, such as the housing sector.

The annual inflation rose to a record 6.2% in September, driven by a 12.6% jump in housing costs.

"We venture in posting that cutting the discount rate may indeed alleviate inflationary pressures, or at least not make them any worse," NBK said.

The central bank has declined to disclose the composition of its currency basket but said the dollar would play a major role.

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