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Wed 8 Oct 2008 05:06 PM

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UAE, Kuwait follow suit and cut rates

UPDATE 1: Central banks around the world slash interest rates as financial crisis escalates.

Kuwait slashed its key discount interest rate by 125 basis points on Wednesday while the United Arab Emirates cut by a more modest amount, tracking a round of emergency rate cuts by major central banks.

Analysts said the changes, which also included moves to make access to emergency funding easier, made it more likely that other Gulf states would cut rates in coming days as authorities bid to ease liquidity tensions in the region.

The Kuwait cut added to central bank offers of funds to local lenders in recent days. The only Gulf Arab state to delink its currency from the dollar, it cut the benchmark discount rate to 4.5 percent from 5.75 percent and the repo rate to 2.5 percent from 3.5 percent.

"[The Kuwait central bank move] is likely to put pressure on other central banks in the region. They are likely to follow suit," said Mary Nicola, Middle East economist for Standard Chartered Bank in Dubai.

The UAE lowered its overnight repurchase rate to 1.5 percent from 2.0 percent and cut the borrowing rate on its emergency facility, making it much cheaper for banks to borrow the money.

"It is good the [UAE] central bank realized its rate under the emergency facility was on the high side and reduced it," said the head of Treasury at an Abu Dhabi-based bank.

"The new rates are reasonable and lot of banks will make use of the facility if they need the funds."

Some analysts said Saudi Arabia might respond with a cut in its repo rate by as much as 100 basis points in coming days.

The US Federal Reserve on Wednesday cut its key federal funds rate by 50 basis points to 1.5 percent in a coordinated move with the European Central Bank (ECB) and Britain, Canada, Sweden and Switzerland. China also loosened monetary conditions.

Markets have tumbled around the world as the upheaval that began on Wall Street spread, effectively shutting down interbank and other loan markets. In the Gulf region, interbank rates have risen in Saudi Arabia, Kuwait and the United Arab Emirates.

Kuwait central bank chief Sheikh Salem Abdul-Aziz Al-Sabah said the move was driven by an assessment of world developments.

"[It] is basically related to the crisis sweeping the international money markets and the need to strengthen the local environment," he said in a statement.

The bank last cut rates, by 50 basis points, last January.

"It is a positive step but we expect more rate cuts," said Rola Dashti, head of Kuwait Economic Society.

The head of the Kuwaiti Banking Association (KBA), Abdul-Majeed Al-Shatti, told newswire Reuters he expected the central bank to unveil new directions, adopting a more accommodative stance towards banks.

He did not elaborate but repeated KBA's demand for government institutions to boost deposits at private banks as a measure to increase liquidity.

Gulf stock markets slumped in tandem with global equities on Wednesday, led by real estate and banking stocks, as investors fretted that the economies of the world's top oil-exporting region are not shielded from the global turmoil. Kuwait's main index regained some losses after the cut.

"This is a massive move... and it's the right time to intervene to stop the panic in the markets," said Mustafa Behbehani, director of Kuwait Gulf Group.

"Nobody can stop this other than the government stepping in quickly before there is a financial collapse."

Gulf states had been more circumspect in their responses to the global credit crunch, assuring investors that their economies are sound and banks are safe.

Central bankers are hampered by fears over inflation which is still rampant in the region. But a recovering US dollar and easing oil prices have reduced some of the pressure.

Saudi Arabia, the world's largest oil exporter, said on Wednesday that it had yet to use several instruments at its disposal including repurchase rate moves.

The Saudi central bank said financial institutions already held about 200 billion riyals ($53.33 billion) in government papers with the option to borrow up to 75 percent of the value of the securities. None had so far chosen to exercise this option. (Reuters)

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