By Dylan Bowman and Reuters
UPDATE 2: One- and three-month EIBOR up on news of $13.6bn central bank emergency fund.
United Arab Emirates interbank offered rates rose on Tuesday after the Gulf state's central bank said it would launch an emergency funding facility for banks to help them cope with the global credit crisis.
The one-month Emirates Interbank Offered Rate (EIBOR) rose as much as 16.25 basis points to 3.6875 percent, from 3.525 percent on Monday, before easing to 3.64375 percent. The rate is up more than 160 basis points since early June.
Three-month interbank rates rose to 3.7 percent from 3.61 percent on Monday and are up about 170 basis points since June.
The UAE central bank said on Monday it is to pump 50 billion dirhams ($13.6 billion) into the banking sector to prevent the credit crunch that has hit global markets spreading to the Gulf state.
It said a 50 billion-dirham facility will be set up for banks operating in the UAE to access if needed, without giving details on how the facility would be structured or operated.
Banks in the Gulf have been suffering from a liquidity shortage caused in part by an exodus of foreign money after Gulf states said they would keep their dollar pegs, quashing market bets their currencies could be revalued to fight inflation.
The UAE is the only Gulf state to announce such a measure, but bankers have called on others to follow suit.
Kuwait's central bank said on Monday it "will not hesitate" to provide liquidity to the banking system if necessary.
Analysts and bankers said market rates would likely ease once banks begin to draw funds from the facility to help them finance soaring lending demands from an economic boom fuelled by a more than five-fold rise in oil prices since 2002.
"I think the central bank line is going to offset the pressure of tightening on liquidity internally. At this point it looks sufficient," said Sanjay Uppal, chief financial officer of Emirates NBD, the largest Gulf Arab bank by assets.
"The money markets in the UAE are quite tight right now," he said. Emirates NBD's net profit surged 45 percent in the second quarter as it lent more to corporate and retail customers.
Overall loans and advances in the UAE, the world's fifth-largest oil exporter, surged 49.4 percent in the year to the end of June, according to central bank data.
With higher funding costs, credit growth is likely to slow, Uppal said.
Still, UAE interest rates, which have tracked seven US rate cuts in the last year, remain sharply negative.
Credit growth should continue even if banks become more careful about their lending, said Monica Malik, an EFG-Hermes economist.
"Interest rates are still very attractive for corporates," Malik said. "The central bank move is to reassure markets that liquidity is there if needed by the banking system. If liquidity tightens banks will become more selective and more speculative credit growth will calm down."