Money & BusinessGCC Countries

GCC central banks raise interest rates after Fed’s final increase of year

The central banks of the UAE, Saudi Arabia, Bahrain and Qatar raised their benchmark borrowing rates after the US Federal Reserve increased its key interest rate for the seventh time in 2022 to restore price stability and tame inflation that hit a four-decade high this year.

The Fed raised the policy rate by 50 basis points, a softer increase than the previous four of 75 bps each after consumer prices began to ease. This brings interest rates to a range of 4.25 per cent and 4.50 per cent, the highest level in 15 years.

Inflation in the world’s largest economy fell to 7.1 per cent in November, from 7.7 per cent in October, after soaring to a pandemic high of 9.1 per cent in June.

Most central banks in the GCC follow the Fed’s policy rate moves due to their currencies being pegged to the US dollar.

The Saudi Central Bank, better known as Sama, raised its repurchase agreement (repo) rate by half a percentage point to 5 per cent and its reverse repo rate by a similar margin to 4.5 per cent.

The UAE Central Bank raised the base rate applicable to the overnight deposit facility by 50 basis points to 4.4 per cent, from 3.9 per cent, effective from Thursday, it said on Wednesday.

The Emirates decided to maintain the rate applicable to borrowing short-term liquidity from the regulator through all standing credit facilities at 50 bps above the base rate.

The base rate, which is anchored to the Fed’s interest on reserve balances (IORB), signals the general stance of the UAE Central Bank’s monetary policy and provides an effective interest rate floor for overnight money market rates.

The Central Bank of Bahrain increased its key rate on one-week deposits by 50 bps to 5.25 per cent “in light of the development of the international financial market and … to ensure the smooth functioning of the money markets”. The Bahraini regulator also raised its interest rate on overnight deposits by half a percentage point to 5 per cent, and by a similar margin on its four-week deposit rate, raising it to 6 per cent. The lending rates were also increased by half a percentage point to 6.5 per cent.

The Central Bank of Qatar also raised its repo rate by 50 bps to 5.25 per cent. It raised its deposit rate by a similar margin to 5 per cent and the lending rate by an equal amount to 5.5 per cent.

Global inflation is expected to hit 8.8 per cent in 2022, from 4.7 per cent in 2021, but is set to decline to 6.5 per cent in 2023, said IMF.

Mena economies are set to expand 5.5 per cent this year, their fastest pace since 2016, with oil-exporting countries in the region, benefitting from high hydrocarbon prices, according to the World Bank.

GCC economies are projected to expand by 6.9 per cent in 2022, driven by high oil prices, as well as higher growth rates in non-oil sectors.

The US, the biggest of the group, is forecast to expand by 1.6 per cent, instead of 2.3 per cent as previously estimated and down from 5.7 per cent last year, according to the fund.

However, on Wednesday the Fed lowered its growth forecast next year with the US economy now expected to expand 0.5 per cent, instead of an earlier 1.2 per cent estimate.

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The National
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