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Gulf central banks raise interest rates after US Fed’s move

Building, City, Town WAM
The impact of higher interest rates among Gulf oil exporters in 2022 has so far been limited

Most Gulf states said on Wednesday they would increase their key interest rates after the Federal Reserve raised its key policy rate by three-quarters of a percentage point for the fourth straight time.

While the US central bank’s policy decision was motivated by its desire to lower stubbornly high inflation in the United States, it also will guide Gulf monetary policy as most of the region’s currencies are pegged to the dollar.

Saudi Arabia and the United Arab Emirates, the region’s two largest economies, both increased rates by 75 basis points. The Saudi Central Bank (SAMA) lifted its repo and reverse repo rates to 4.5 percent and 4 percent, respectively. The UAE’s base rate will rise to 3.9 percent, effective on Thursday.

Bahrain also raised its main rate by 75 basis points while Qatar increased rates by between 50 and 75 basis points. Kuwait and Oman did not immediately announce any rate changes.

The impact of higher interest rates among Gulf oil exporters in 2022 has so far been limited.

“The GCC economies have seen strong non-oil sector performances this year despite the rate hikes,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

“We expect some greater headwinds next year as the rate increases are further passed on, though progress with medium-term development plans should support activity.”

Higher oil prices are likely to lead to fiscal surpluses and growing foreign reserves for Gulf economies this year, which will reduce the need for governments to borrow and to crowd out the private sector, a senior IMF official said earlier this week.