Gulf central banks increase key rates, mirroring US Fed move

WAM

Most Gulf states raised key interest rates by half a percentage point on Wednesday, following the Federal Reserve’s decision to increase rates by the same.

Monetary policy in the six-member Gulf Cooperation Council (GCC) is usually guided by Fed policy decisions because most regional currencies are pegged to the US dollar.

Saudi Arabia and the United Arab Emirates, the region’s two largest economies, both increased rates by 50 basis points. The Saudi Central Bank (SAMA) lifted its repo and reverse repo rates to five percent and 4.5 percent, respectively. The UAE increased its base rate to 4.4 percent, effective on Thursday.

The central banks of Bahrain and Qatar also announced rate hikes of 50 basis points (bps) to their main rates. Kuwait raised its discount rate by 50 bps last week, from three percent to 3.50 percent, effective December 7.

The impact of higher interest rates among Gulf oil exporters in 2022 has so far been limited, although analysts expect the effect will be felt down the line.

“It is inevitable that higher rates will act as a break on credit growth and hurt corporate profitability, although banks will benefit from higher net income margins,” said Justin Alexander, director of Khalij Economics and Gulf analyst for GlobalSource Partners.

“However, there is evidence to suggest the impact of higher rates on non-oil growth in the region is limited during times of strong oil prices that support liquidity.”

While the Fed projected a near stalling of US economic growth next year, the IMF estimates Gulf GDP growth at 3.6 percent. All of the region’s oil exporters are trying to diversify their economies away from oil and gas.