GCC CENTRAL BANKS RAISE INTEREST RATES AFTER FED MOVE
▶ US increases key rate after inflation touched 41-year high of 8.5% in March
The central banks of the UAE, Saudi Arabia, Bahrain, Kuwait and Qatar raised their benchmark interest rates in line with the US Federal Reserve, which raised its key rate by half a percentage point on Wednesday.
The move by the Fed, the second in less than three months, is its most aggressive in 22 years as it tries to curb inflation and cool an overheating job market.
Inflation in the world’s largest economy hit 8.5 per cent in March, its highest since 1981.
Most central banks in the six-member GCC bloc follow the Fed’s moves on key interest rates as their currencies are pegged to the US dollar.
The only exception is Kuwait, whose dinar is linked to a basket of currencies.
The UAE Central Bank raised its base rate for the overnight deposit facility by half a percentage point on Wednesday. It maintained the rate applicable to borrowing short-term funds from the regulator through all standing credit lines at 50 basis points above the base rate.
The base rate, which is anchored to the Fed’s interest on reserve balances, signals the general stance of the central bank’s monetary policy and provides an effective interest rate floor for overnight money market rates.
The Saudi Central Bank also raised its repurchase agreement (repo) rate by half a percentage point to 1.75 per cent and the reverse repo rate by 0.5 per cent to 1.25 per cent, the banking regulator said on Wednesday evening.
The Central Bank of Kuwait raised its discount rate by 25 bps to 2 per cent, from 1.75 per cent, effective from Thursday.
The decision reflects the regulator’s “vigilant monitoring of domestic and international economic and geopolitical developments that resulted in all-time high global inflation rates, mainly driven by increased commodity and energy prices and continuous supply chain disruptions, which constitute a key source of imported inflation”, said Central Bank of Kuwait Governor Basel Al-Haroon.
The Central Bank of Bahrain increased its key one-week deposit rate by 50bps to 1.75 per cent, from 1.25 per cent.
It also raised the overnight deposit rate to 1.5 per cent, from 1 per cent, the four-week deposit rate to 2.5 per cent, from 1.75 per cent, and the lending rate to 3 per cent, from 2.5 per cent.
“Taking into account the evolving domestic and international macroeconomic developments”, the Qatar Central Bank raised its repurchase rate by 50 bps to 1.75 per cent.
It also increased its deposit rate by half a percentage point to 1.5 per cent and raised the lending rate by an equal amount to 2.75 per cent.
On March 16, the Fed approved a quarter percentage point increase, its first since December 2018, after two years of keeping interest rates near zero.
Washington’s accommodative monetary policy, which was intended to cushion the economy from Covid-19 pandemic shocks, has pushed well above the Fed target of 2 per cent. US stocks rallied after Fed Chairman Jerome Powell signalled that he could slow inflation without triggering a recession. The Dow Jones Industrial Average gained 2.8 per cent while the S&P 500 SPX increased by 3 per cent and the Nasdaq Composite rose by 3.2 per cent.
“Wall Street still believes the Fed will be able to deliver a soft landing and that is good news for equities,” said Edward Moya, a senior market analyst at Oanda.
“The key takeaway from the Fed is that they are not ready to consider larger rate hikes [75 basis points]. It seems risky assets can rally, now that Wall Street has fully priced in the rest of the year’s rate hikes by the Fed.”
The Fed’s hawkish stance to rate increases comes amid increased volatility in the global economy and in energy and commodity markets as a result of Russia’s invasion of Ukraine. The conflict has upended commodity markets, altering global trade, production and consumption patterns, and this will keep food and energy prices at “historically high levels” until 2024, the World Bank said last month.
The International Monetary Fund also lowered its global economy growth forecast for this year and 2023 to 3.6 per cent, revising it down by 0.8 percentage and 0.2 percentage points, respectively, from its January forecast.
The fund expects inflation to hit 5.7 per cent in advanced economies and 8.7 per cent in emerging market and developing economies this year.
Inflation in 2023 is projected at 2.5 per cent for advanced economies and 6.5 per cent for emerging markets and developing states. There is limited headroom for policymakers around the world, whose only recourse is to increase rates to keep inflation in check.
“We expect that the Fed will follow in June with another 50 bps hike and at least 100 bps more hikes by the end of the year,” Emirates NBD said in a research note.
“That will bring the Fed Funds rate at the end of 2022 to 2.5 per cent, up from our previous expectation of 2 per cent. In addition to higher rates, the Fed will also start to run down its balance sheet at a monthly pace of $95 billion, helping to tighten liquidity conditions further.”
In February, S&P Global Ratings said the Fed rate increases and matching moves by the UAE banking regulator would boost the profitability of lenders in the country.
“On average, banks in the UAE will benefit,” S&P said at the time. “We calculate a 15 per cent increase in net income and 1.4 percentage-point rise in return on equity for every 100 basis points increase.”
In the same month, Moody’s Investors Service said the income of UAE banks would return to pre-pandemic levels in the next 12 to 18 months on the back of stronger net interest income and increasing business momentum as the economy continues to rebound.