Cen­tral banks in Saudi Ara­bia and Bahrain also hiked their bench­marks

The National - News - - BUSINESS - SARMAD KHAN

The Cen­tral Bank of the UAE raised its bench­mark in­ter­est rates by 25 ba­sis points, mim­ick­ing the US Fed­eral Re­serve, which hiked on Wed­nes­day its rates for the se­cond time in 2018 – with two more in­creases ex­pected this year.

The UAE’s cen­tral bank raised the in­ter­est rate to 2.25 per cent on its cer­tifi­cate of de­posits, which it uses as a mone­tary pol­icy in­stru­ment through which changes in in­ter­est rates are trans­mit­ted to the UAE bank­ing sys­tem, the reg­u­la­tor said on Thurs­day.

The repo rate ap­pli­ca­ble to bor­row­ing short-term liq­uid­ity from the cen­tral bank against cer­tifi­cates of de­posits has also been in­creased, by 25 ba­sis points to 2.25 per cent, it said.

The US Fed­eral Re­serve in­creased on Wed­nes­day its tar­get range for the fed­eral funds in­ter­est rate by a quar­ter point, to be­tween 1.75 per cent and 2 per cent.

The move re­flects US eco­nomic mo­men­tum, Fed Chair­man Jerome Pow­ell said fol­low­ing the de­ci­sion.

The Fed­eral Open Mar­ket Com­mit­tee in­di­cated that even though it is step­ping up the pace of in­ter­est-rate hikes for 2018 and 2019, eco­nomic growth should con­tinue apace.

Cen­tral banks in the re­gion – with the ex­cep­tion of Kuwait – peg their cur­ren­cies to the US dol­lar, and don’t al­ways raise or cut rates on each spe­cific oc­ca­sion the Fed­eral Re­serve does, but they usu­ally fol­low it in its broad out­line over the long run. The Saudi Ara­bian Mone­tary Au­thor­ity also raised its bench­mark rates late on Wed­nes­day.

The king­dom’s cen­tral bank said it is in­creas­ing its repo rate, at which it lends to banks, by a quar­ter point to 2.5 per cent.

The re­verse repo rate was also raised by 25 ba­sis points to 2 per cent. Bahrain’s in­ter­est rate on the one-week de­posit fa­cil­ity was raised to 2.25 per cent from 2 per cent.

The cen­tral bank of Bahrain also raised its key pol­icy in­ter­est rate on the one-week de­posit fa­cil­ity to 2.25 per cent from 2 per cent.

The cen­tral bank of Kuwait, how­ever, said that it is main­tain­ing its dis­count rate un­changed at 3 per cent.

Qatar’s cen­tral bank said it would raise its de­posit rate by 25 ba­sis points to 2 per cent.

There was no im­me­di­ate an­nounce­ment from Oman.

The ris­ing rates come at a time when global eco­nomic growth is be­ing tested by es­ca­lat­ing trade ten­sions be­tween the US, Euro­pean Union coun­tries, Canada, Mex­ico and China.

The In­ter­na­tional Mone­tary Fund and the World Trade Or­gan­i­sa­tion have al­ready voiced con­cern about the im­pact of tit-for-tat trade tar­iffs on global com­merce.

There are also con­cerns about the im­pact of Fed rate hikes on some emerg­ing mar­ket economies, which may strug­gle in the wake of higher US bor­row­ing costs.

The tim­ing of mone­tary tight­en­ing and the rise in bor­row­ing costs is also crit­i­cal for the en­ergy-de­pen­dent economies of the Ara­bian Gulf re­gion, which are re­cov­er­ing from a slow­down on the back of the three-year oil price slump.

“Higher do­mes­tic in­ter­est rates are a head­wind for the GCC’s eco­nomic out­look, given that the bloc’s busi­ness cy­cle is out of sync with the US,” said Bi­lal Khan, se­nior Mena and Pak­istan economist at Stan­dard Char­tered.

“For in­stance, although the re­cent rise in global oil prices has seen liq­uid­ity con­di­tions in many GCC economies im­prove, pri­vate credit off­take re­mains lack­lus­tre.”

Razan Nasser, se­nior economist at HSBC Bank Mid­dle East, agreed, say­ing “the higher cost of bor­row­ing and the US dol­lar’s strength should con­tinue to weigh on pri­vate credit growth and the com­pet­i­tive­ness of the UAE’s ex­port ser­vices”.

Given that the economies in the re­gion are still re­bound­ing, tighter mone­tary pol­icy needs to be com­pen­sated with a looser fis­cal stance and eco­nomic stim­u­lus, ac­cord­ing to economists.

Last week, Abu Dhabi re­vealed a three-year, Dh50 bil­lion stim­u­lus pack­age and 10 ini­tia­tives that will cre­ate jobs, boost eco­nomic growth in the emi­rate, in­crease con­sump­tion, bol­ster small and medium-sized busi­nesses and re­lax reg­u­la­tions for busi­nesses.

These ini­tia­tives fol­low other steps to pro­pel growth in the emi­rate by buoy­ing the non-oil sec­tors.

Dubai ear­lier an­nounced mea­sures to waive cer­tain ad­min­is­tra­tive fines for com­pa­nies to in­crease the com­pet­i­tive­ness of the emi­rate.

Ms Nasser said the pack­age an­nounced by Abu Dhabi could help off­set some of the im­pact of the mone­tary tight­en­ing, how­ever, “the ex­tent of that re­lief would de­pend on the tim­ing and al­lo­ca­tion of that stim­u­lus”.

The size of the stim­u­lus is about 6 per cent of the emi­rate’s GDP over three years and the eco­nomic im­pact could be pos­i­tive, par­tic­u­larly given that job cre­ation ap­pears to be a key fo­cus, ac­cord­ing to Mr Khan.

“As such, we think the re­cent pol­icy an­nounce­ments from Abu Dhabi and Dubai to use coun­ter­cycli­cal fis­cal mea­sures to sup­port non-oil growth is an ap­pro­pri­ate re­sponse at this stage,” he said.

Fed­eral Re­serve Chair­man Jerome Pow­ell said the de­ci­sion re­flects eco­nomic mo­men­tum in the United States

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