UAE central bank cuts rate in bid to spur lending

Interest rate on a liquidity support facility for banks set for cut to 1.5% from 2.5%.
UAE central bank cuts rate in bid to spur lending
By Raissa Kasolowsky
Mon 31 Aug 2009 05:43 PM

The UAE central bank said on Monday it would cut the interest rate on a liquidity support facility for banks to 1.5 percent from 2.5 percent to try to boost economic growth and spur lending.

The rate cut on the facility, which was introduced last year and which allows banks to deposit securities with the central bank in exchange for liquidity, would take effect from Tuesday, Sept. 1, the central bank said in a statement.

"This measure would basically reduce the cost of economic activities in the UAE, particularly investment spending, and would contribute to sustained growth and support the national economy in general," the central bank said in a statement.

Gulf Arab economies have been hit hard by the crisis, with a long-running expansion in the UAE only expected to resume late this year, the government says. Lending growth has also stopped, according to the latest data.

A treasury official said the rate cut referred to a facility launched in 2008, by which banks could deposit securities with the central bank in exchange for liquidity, and which was similar to its discount rate.

"The maximum duration of this facility is three months, but is renewable," Mohamed al-Tamimi, assistant executive director of the central bank's treasury department, told Reuters.

The central bank said it would lend against discounted "first class securities."

Asked what constituted a first class security, Tamimi said he did not want to be specific. "They have to be acceptable to the central bank. The banks know the conditions."

UAE banks were liquid and currently held around 60 billion dirhams ($16 billion) in certificates of deposit with the central bank, Tamimi said.

Bankers said Monday's rate cut was just another part of the central bank's efforts to bring down the Emirates interbank offered rate (EIBOR).

"Nobody is using this facility right now, and I'm not sure they will, even at these levels," said Mohammed al-Hashemi, associate director of asset and liability management and money markets at Emirates Bank.

"It's more of a signal for the banks for EIBOR rates to come lower".

Earlier this month, the central bank overhauled the panel of providers for the interbank offered rate in the hope it would lower interest rates, which it has said are too high and do not reflect the market.

The new 11-bank panel will include four new local banks and drop two international lenders, and will get to work by mid-September.

The one-month rate has fallen to 1.78 percent from 2.05 percent on Aug. 3, a day before the central bank said it would introduce its new interbank offered rate mechanism, and bankers say they expect the decline to continue.

The UAE primarily sets monetary policy through its benchmark interest rates. The rates, which typically track US Federal Reserve actions given the UAE's dollar peg, remained unchanged on Monday. (Reuters)

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