The UAE and Kuwait have slashed interest rates in line with the US Federal Reserve's recent move to cut its rates by half a percentage point, in an effort to protect the world's largest economy from the current global credit market crunch.
The move in the UAE follows earlier comments made by the Central Bank governor Sultan Nasser Al Suweidi that interest rates would be cut "accordingly" if the US Federal Reserve chose to cut its rates.
However, the decision comes at a time at which inflation in the country is at a 19-year high. Fears remain that a cut in interest rates will put more pressure on the situation and force prices up even further. Inflation reached a record high of 9.3% last year.
The UAE's currency is pegged to the US dollar at a fixed rate introduced in 1997. This means that the country is under pressure to reflect US rates cuts to maintain parity between the two currencies.
Neighbouring GCC countries Saudi Arabia, Qatar, Oman and Bahrain are in a similar situation.
The monetary policies of these countries are to a degree determined by an agreement to keep their dollar pegs until the single currency is introduced across the GCC states. This is planned to take place in 2010, but there have been concerns that this target may not be met. Qatar, Oman and the UAE recently agreed to delay the process.
In the meantime, the value of the dollar has tumbled. Kuwait removed its dollar peg in May of this year in response to inflation at home and the rising costs of imports. Speaking to reporters in Damascus recently, Al Suweidi commented that the UAE inflationary situation was "temporary" and that there were currently no plans to take measures to deal with rising inflation. Asked if the UAE was considering changing the value of its currency peg, Suweidi said: "No... at this point in time we don't see any reason."
The UAE cut the three-month certificate of deposit rate to 4.80%, from 4.95%, and the longer-term six-month rate by 20 basis points to 4.80% from 5%. The US Federal Reserve's move marks the first time that interest rates have been cut in more than four years.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.