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Mon 2 Apr 2007 02:58 PM

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Kuwait, UAE cut interest rates

Move is designed to ease pressure on the currencies ahead of a possible revaluation.

The United Arab Emirates and Kuwait cut interest rates on Monday to ease pressure on dollar-pegged currencies before central bankers of the world's top oil-exporting region meet to discuss a possible revaluation.

The United Arab Emirates cut its one-month and one-week certificate of deposit rates by 5 basis points on Monday in a surprise move by a central bank that usually shadows U.S. Federal Reserve policy.

It took the one-month rate to 5% and the one-week rate to 4.80%.

Kuwait's central bank cut its three-month intervention rate by 37.5 basis points to 5.25% on Monday, a day after reducing its repurchase rate by 12.5 basis points. The bank warned last week it could move to deter speculators betting on a revaluation of the dinar currency.

"Both are indicators of the liquidity that is flooding into the local markets," said Steve Brice, regional head of research at Standard Chartered in Dubai.

"The moves are also possibly an indicator of central banks' desire to make it more expensive to bet on an appreciation."

Speculation about a currency revaluation has been gathering momentum in the build-up to a meeting of Gulf Arab central bank governors in Saudi Arabia on Tuesday and Wednesday.

The meeting will review the system of the dollar-pegged exchange rates agreed by Kuwait, Saudi Arabia, the UAE, Oman, Qatar and Bahrain to prepare for monetary union in 2010.

Markets first began betting on a currency revaluation in the region as the dollar fell around 10%against the euro last year, making some Gulf imports more expensive and fuelling inflation.

Speculation grew after Oman said it would not make the 2010 deadline for a single currency, and reached fever pitch in January when the UAE central bank raised the prospect of a region-wide revaluation after the meeting in Medina, Saudi Arabia this week.

The UAE, one of two candidates for a revaluation according to a Reuters poll last month, will likely return to a policy of Fed tracking once the pressure on the exchange rate subsides, a source familiar with central bank thinking said.

"These are short term measures because of the large cash inflows," the source said. "This is not a policy shift."

The Fed left interest rates unchanged last week at 5.25%.

The country most likely to revalue, according to the Reuters poll, was Kuwait, which warned last week that it could move to quell speculation in the dinar.

The bank followed up by cutting the repo rate to put more dinars on to the local money market, a move analysts, including Rafeek KP, assistant vice president, treasury, at Abu Dhabi Islamic Bank, said was likely to be first among many.

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