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February 1, 2008

GCC cuts interest rates by 50 basis points

by Richard Kilner

Story link: GCC cuts interest rates by 50 basis points

With the exception of Oman, yesterday saw every member state of the Gulf Co-operation Council cut interest rates by 50 basis points, echoing the US Federal Reserve’s recent change.

Although deposit rates were cut, lending rates remained unchanged in an effort to keep inflation reined in.

Corporate borrowers may be in a better position to negotiate lending deals after the moves, whereas consumers will be neither better nor worse off.

The one-week deposit facility of the Central Bank of Bahrain was slashed by 3%, to 3.5%.

The bank’s overnight deposit facility also fell, but only by half a point to 2.5%, with other rates remaining unchanged.

The reasoning behind the rate cutting strategy is because the dollar peg that the GCC members employ meant that speculation on local currencies had to be decreased, according to Shakeel Sarwar of Securities and Investment Company.

Sarwar went on to say that the move would have a moderate inflationary effect.

Qatar and the UAE are suffering most from inflation, and may have to revalue their currencies in the future. Bahrain and Saudi Arabia have more moderate inflation and are not expected to do so.

Repurchase rates in Kuwait and the UAE fell by 50 basis points to 3.5%.

Qatar’s inflation rate, which is nearing 14%, has led it to say that it is considering severing the dollar peg, and the UAE has hinted it may be in favour of a revaluation.

However, both Bahrain and Saudi Arabia are committed to retaining the dollar peg, and Qatar and the UAE are somewhat pressured to keep it too as the region heads towards a single market and single currency.

 

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