Homeowners in the UAE and Kuwait celebrated on Wednesday as the two Gulf Arab states cut interest rates after the US Federal Reserve slashed its benchmark rate for the first time in more than four years.
The move means those with property in the countries will be pay less on their mortgage than before.
“In terms of lower interest rates, that should in theory reduce debt servicing costs,” said Standard Chartered Middle East economist Steve Brice.
“If you have a mortgage that is based on a spread above Ibor [Interbank Offered Rate], which most are, then Ibor has come down so the interest rates at which you pay on your mortgage have come down.”
Kuwait, the Middle East’s fourth-largest oil exporter, cut its repurchase rate by 50 basis points to 4.75%, the central bank said, but left the benchmark discount rate unchanged at 6.25%. It had cut the rate by 25 basis points last week.
The UAE, which pegs its currency to the US dollar, cut its one-week, one-month and three-month certificate of deposit (CD) interest rates by 15 basis points, the central bank said.
The second-largest Arab economy does not have a benchmark interest rate. It cut the one-week CD to 4.60% from 4.75% and the one-month CD rate to 4.70% from 4.85%.
Oman, Qatar and Bahrain have so far left their interest rates unchanged.
Expats on the other hand are still holding their breath to see what affect the rate cut and the plummeting value of the dollar will have on inflation and exchange rates.
The dollar fell to a fifteen-year low after the Federal Reserve cut US interest rates on Tuesday in a move to shield the world’s largest economy from a housing slump and financial turbulence.
The dollar index, which tracks its value against six leading currencies, fell to a low of 79.091, its weakest level since September 1992. The currency fell to a low of $1.3987 against the euro following Tuesday’s decision, just off a record low of $1.3989.
Brice warned that Kuwait and the UAE’s rate cuts could lead to a rise in inflation and heap more pressure on Gulf states to revalue their currencies.
“I think fundamentally the pressure [to depeg from dollar] is there. With very strong economies and still very high oil prices, and all these factors are going to increase inflationary pressures,” he said.
The UAE and its neighbours in Saudi Arabia, Qatar, Oman and Bahrain are under pressure to follow any US rate cut to maintain the relative value of their dollar-pegged currencies, however this limits their ability to fight inflation that has surged as a quadrupling in oil prices since the start of 2002 has fuelled economic growth.
Inflation in Saudi Arabia, the world’s largest oil exporter, surged to a seven-year high in July on higher food prices and rents.
Inflation in Kuwait was at a 12-year high in April, and in Qatar at a record 14.81% in March.
Oman has seen inflation grow at its fastest pace this year, hitting almost 6% in July. In the UAE inflation hit 9.3% last year.
The GCC had agreed to keep pegs to the tumbling U.S. dollar in place until the region created a single currency in 2010. But Kuwait abandoned its peg to the dollar on May 20, saying the US currency’s weakness was fuelling inflation by making imports more expensive.
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