SVB collapse likely to bring down Gulf interest rates

Reuters/Brittany Hosea-Small

• US interest rates fell almost 1 percentage point after the collapse of SVB
• Gulf currencies are pegged to the dollar and usually match US rates
• Fears of contagion led Gulf stock markets to fall on Monday

The collapse of Silicon Valley Bank (SVB) and continuing concerns over the broader financial stability of the market could help to bring down interest rates across the Gulf.

Following SVB’s demise, US interest rates fell sharply from 5.05 percent to 4.10 percent in just three days – a scale of drop only matched by events such as the 1987 crash and the 9/11 attacks in 2001.

US Federal Reserve chair Jerome Powell had been expected to continue his cycle of rate hikes at the upcoming meeting of the Federal Open Market Committee on March 21-22.

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Experts had predicted another increase of 50 basis points (bps) before the demise of SVB, which became the largest bank to fail since the 2008 crisis.

Dubai-based Vijay Valecha, chief investment officer at Century Financial, said: “Jerome Powell has a difficult task at hand of balancing price stability and financial system stability.”

In the current volatile situation, the VIX Index – a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market – is approaching 30, indicating ‘tremendous uncertainty’ in the market. This represents banking sector risk widening to its highest level since February 21. 

“These factors call for the Fed to reconsider its hawkish stance,” said Valecha. “Currently, the best estimate lies between 0bps to 25bps change for the March Federal Open Market Committee.”

Gulf central banks typically match US interest rates because their currencies are pegged to the dollar (the Kuwaiti dinar is pegged to a basket of currencies that includes the dollar).

In February central banks in Saudi Arabia, the UAE and Bahrain mirrored the policy of the US Federal Reserve and increased their interest rates by 25bps. Qatar opted to hold.

Breaking the cycle of hikes

Despite signalling a more dovish stance after a series of larger hikes, the Fed has previously maintained that increases would continue as it battles to rein in inflation in the US.

However, Goldman Sachs analysts on Sunday said they no longer expect the Fed to deliver a rate hike at its meeting next week in light of the recent stress and the collapse of SVB.

Abu Dhabi-based Dahlia Sabaayon, senior investment analyst at Al Dhabi Capital, said: “While the underlying reasons for a possible slowdown in hikes are not pleasant, any hint of reluctance towards further rate-hikes will be positive for the GCC, which has so far endured the recent global inflationary phase admirably. 

“The combination of oil-price levels high enough to generate surpluses and stable rates will be positive for most sectors in the Gulf.”

US consumer price index data was expected to reveal on Tuesday that inflation cooled to 6 percent year on year in February – down from 6.4 percent the previous month – providing more impetus for a hold on tightening monetary policy further to give banks some degree of flexibility.

London-based Paul Donovan, chief economist at UBS Global Wealth Management, said the increased uncertainty about lending standards might be a reason for the Fed to pause “the relentless hike, hike, hike cycle”.

Meanwhile Dubai-based Nigel Green, CEO and founder of financial advisory, asset management and fintech organisation deVere Group, said the collapse of SVB and Signature Bank is a “springboard event” for bitcoin as investors around the world look for safe havens and alternative currencies, and weigh the likelihood of a period of lower interest rates.

“We expect the stress in the banking sector, and the wider impact on confidence, now will give the central bank cause for pause on its rate hike programme – which is bullish for bitcoin,” he said.

Most Gulf stock markets fell in early trade on Tuesday, as fears of contagion risks from the SVB collapse continued to drag financial markets.

Saudi Arabia’s benchmark index eased 1 percent; Dubai’s main share index dropped 1.5 percent; Abu Dhabi’s index slipped 1.8 percent; The Qatari index lost 1.9 percent; Egypt and Bahrain were down 0.5 percent and 0.2 percent respectively; and the All Share Market Index in Boursa Kuwait dropped 2.9 percent. However, the Omani index bucked the trend to trade 0.7 percent higher.

Oil prices fell more than $1, extending the previous day’s slide.