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Mon 31 Aug 2009 05:43 PM

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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%.

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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Bhavan 10 years ago

Today banks are charging approximately 8% minimum in which EIBOR 2.5 + bank interest of 5.5%. How this will give the benefit to a customer?? Unless the bank pass this benefit to customer there is no use and no boost to economic growth.

ACE 10 years ago

The Central Bank is doing just what the economy needs through these rate cuts, but are the banks going to pass these on to the consumers??? DOUBT IT! The impunity that bankers have in the region is just unbelievable. In my next life I want to come back as a banker - in Dubai! I took a 'floating rate' mortgage but the bank forgot to tell me that floating only means open to upward revisions! No where else in the world would banks be allowed to keep such high profit margins- not in the biggest liquidity freeze of the century. How are they going to revive property prices in the region when the bankers are only seen to be hankering for their proverbial pound of flesh! This situation definitely needs a rethink...

Major Problem 10 years ago

its an outrage.. in every country in the world they are helping indebted and stressed homeowners by dropping rates - here they can tear up the contract whenever they want. Rates can only go up - not down in the UAE.

crazylegs 10 years ago

Excuse me for not jumping in the air... unless this is tied to a reduction in mortgage interest rates it is simply meaningless for Mr & Mrs Joe Public. there are a glut of properties available that will stay empty unless they become attractive to home buyers ( not neccessarily investors). come on banks, do the right thing.

Pushpa 10 years ago

Lately there has been lot of articles by Cental bank reducing rates. Are they actucally doing it. As a customer we do not see it. Why are they not checking on the banks. If the economy has to move forward they have to do it with the customers. Only talks will not help. Genuine action is required.