Economy Fed may pause rate hikes after latest increase By Gavin Gibbon May 4, 2023 Reuters/Kevin Lamarque Fed chairman Jerome Powell said the Federal Open Market Committee remains attentive to inflation GCC banks raised rates in line with latest US Federal Reserve rise Fed chairman intimated there could be rate pause in June Further rate rises could increase profitability of UAE banks The US Federal Reserve has hinted that it may be time to pause interest rate hikes after announcing its tenth consecutive increase since March 2022. As widely expected the Fed has raised its target interest rate by 25 basis points (bps), with the majority of Gulf central banks, whose currencies are pegged to the US dollar, following suit. “I think this is the peak of the cycle for the US, and hence for the GCC,” said James Reeve, chief economist at Jadwa Investment. Will GCC banks shrug off the global banking meltdown? GCC economies to weather latest Fed rate hike Emerging countries to suffer most if Fed rate hits 6% The Saudi central bank, Sama, raised its repo rate by 25bps to 5.75 percent and its reverse repo rate also by 25bps to 5.25 percent, according to a statement. The UAE Central Bank increased its base rate for the overnight deposit facility by a quarter of a percentage point to 5.15 percent, from 4.9. Bahrain raised all of its key interest rates by 25bps, taking the one-week deposit facility rate to 6 percent from 5.75. Qatar increased its repo, lending and deposit rates by 25bps to 5.75 percent, 6 percent and 5.5 percent respectively. Most major stock markets in the Gulf were subdued in early trade on Thursday, following the rate increase. Saudi benchmark index dropped 0.3 percent, Dubai’s main share index fell 0.1 percent and the Abu Dhabi index eased 0.1 percent. Qatar bucked the trend to trade 1 percent higher. While Fed chairman Jerome Powell intimated that there could be a rate pause in June, it came with a caveat that the Federal Open Market Committee remains highly attentive to inflation and is data dependent. As such, there is a risk that the pause is temporary. Scott Livermore, Dubai-based chief economist at Oxford Economics, said: “The Fed was careful in its forward guidance not to paint itself into a corner.” He added that there was no indication that interest rates could be cut any time soon, particularly with inflation still running well above its 2 percent target. The hike in interest rates comes as concerns grow around another US regional bank. Los Angeles-based PacWest Bancorp is the latest to report troubles and comes amid a banking crisis that has seen Silicon Valley Bank, Signature Bank and, most recently, First Republic all fail since March. Vijay Valecha, chief investment officer, Century Financial, said rising interest rates are likely to increase the profitability of UAE banks, already buoyed by strong Q1 results. Emirates NBD, one of the largest banks in the country, saw a 7 percent increase in deposits, including a AED19 billion ($5.17 billion) increase in current and savings accounts. Similarly, First Abu Dhabi Bank recorded an AED80 billion increase in customer deposits. However, he cautioned that non-performing loans and the cost of risk may also rise marginally due to lower credit demand amid the rates increase. “Nevertheless, UAE banks have adequate capital adequacy ratio, providing a strong buffer against significant global banking sector turmoil,” Valecha said. Attention now turns to the European Central Bank, which is expected to raise interest rates for the seventh meeting in a row on Thursday as it continues its fight against inflation in the Eurozone. Reeve said: “All being equal, this will mean a stronger euro. Thus, the GCC will be paying higher prices for European imports, which will feed through to inflation.” Inflation in the GCC was expected to be between 2.1 percent and 3.3 percent this year and fall lower in 2024.