(Bloomberg) -- Gulf policymakers followed the US Federal Reserve’s move to cut interest rates for the first time since the Covid-19 pandemic, giving the energy-rich region some respite from the impact of lower oil prices.
Central banks in Saudi Arabia, the United Arab Emirates and Bahrain matched the Fed’s decision on Wednesday, reducing their rates by half a percentage point, while Qatar slashed its rates by 55 basis points.
Kuwait, which maintains a peg to a basket of currencies as opposed to just the US dollar, reduced its discount rate by 25 basis points.
Read: Fed Cuts Rates by Half Point In Decisive Bid to Defend Economy
Although inflation has been relatively muted in the wider Gulf region in comparison with post-pandemic surges in the US and Europe, policymakers have little room to maneuver due to their greenback-pegging policy. They tend to move in lockstep with US central-bank decisions, with most regulators in the region following the Fed’s rate hikes since the economic upheaval triggered by the coronavirus.
Gulf countries “have not needed rates as high as the US, with inflation in the region largely at or below 2%,” Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC, said ahead of the Fed’s decision. A rate-cutting cycle would be welcome as a weaker oil-price outlook “increases the funding requirement for some regional countries and for their investment programs,” she said.
For a region still so heavily dependent on energy production to support economic growth, lower oil prices will ultimately be more important than an easing in the monetary environment.
Brent crude prices have fallen almost 8% to about $72 per barrel this month, well below levels needed for several countries in the region to balance their budgets.
For Saudi Arabia, the largest economy among the six countries comprising the Gulf Cooperation Council, lower rates may provide some relief. Borrowing costs as measured by the three-month Saudi Interbank Offered Rate, or Saibor, dropped ahead of the Fed’s long-awaited cut, falling below 6% for the first time this year.
The kingdom is spending hundreds of billions of dollars on a diversification drive championed by Crown Prince Mohammed bin Salman and dubbed Vision 2030. While part of that will be funded by oil revenue, the government also needs to attract foreign investment and borrow.
Gulf rate cuts:
- Saudi Arabia cut its repo rate by 50 basis points to 5.5% and its reverse repo rate to 5%
- The UAE cut its overnight deposit rate by 50 basis points to 4.9%
- Qatar decreased its repo rate by 55 basis points to 5.45%, its lending rate to 5.7% and its deposit rate to 5.2%
- Kuwait reduced its discount rate by 25 basis points to 4%
- Bahrain lowered its overnight deposit rate by 50 basis points to 5.5%
What Bloomberg Economics Says...
“For countries in the Middle East and North Africa, the larger the cut, the bigger the boost is from capital inflows seeking higher yields, demand for oil and for matching rate reductions among Gulf countries.”
— Ziad Daoud, chief emerging-markets economist.
The impact of rate cuts across the GCC “will be limited in 2024 with time for these to feed into bank lending rates, though should be supportive in 2025 especially as the more cuts take place,” according to ADCB’s Malik.
--With assistance from Sherif Tarek.
(Updates with Saudi rate cut)
©2024 Bloomberg L.P.
