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Gulf central banks raise rates after US Fed’s third hike in a row

REUTERS/Rick Wilking
The Fed's move serves to guide Gulf monetary policy as most of the region's currencies are pegged to the dollar.

Gulf central banks raised their key interest rates on Wednesday after the US Federal Reserve delivered its third consecutive three-quarter percentage point hike, with Brent dropping below $90 immediately after the Fed news before recovering.

While the Fed’s move is motivated by bringing inflation down in the United States, it also serves to guide Gulf monetary policy as most of the region’s currencies are pegged to the dollar.

Saudi Arabia and Bahrain lifted their benchmark rates by a matching 75 basis points (bps), and Qatar and the United Arab Emirates said their matching rate hikes will take effect on Thursday.

Higher oil prices and growing non-oil revenue in the region’s biggest economies, Saudi Arabia and the UAE, have also boosted their GDP growth forecasts.

“So far, non-oil activity has remained resilient, with the improving economic backdrop supporting private confidence and credit demand,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

“However, we expect the sharp pace of interest rates hikes to dampen domestic demand as they build and filter into borrowing rates. The monetary tightening will add to the economic headwinds next year, alongside the global recession risks and outlook (for) strong GCC currencies, which will impact competitiveness.”

The Saudi Central Bank (SAMA) lifted its repo and reverse repo rates by 75 bps to 3.75 percent and 3.25 percent, respectively. The UAE’s central bank will from Thursday hike its base rate by three-quarters of a percentage point to 3.15 percent.

Qatar and Bahrain also said they were increasing their main rates by 75 bps. Qatar’s central bank will from Thursday increase its lending rate to 4.5 percent, deposit rate to 3.75 percent and repo rate to 4.0 percent.

Bahrain raised its key policy interest rate on its one-week deposit facility to four percent.

Kuwait, which pegs its dinar against a basket of currencies that includes the dollar, increased its key discount rate by 25 bps to three percent, having more flexibility to stray from Fed policy than its neighbours.

Oman, the remaining member of the six-country Gulf Cooperation Council, is widely expected to follow with a similar move.