Reuters
Dubai

Four Gulf Arab states raised interest rates after the US Federal Reserve’s decision to do so on Wednesday as they scrambled to fend off pressure on their currencies due to low oil prices.
The central banks of Saudi Arabia, Kuwait and Bahrain announced hikes of a quarter of a percentage point in key official rates.
The UAE central bank said yesterday it decided to raise the interest rate on its certificates of deposits by 25 basis points, effective immediately, it said in a statement.
The announcement came a day after the US Federal Reserve raised rates for the first time in nine years.
The UAE rate hike follows interest rate rises of a quarter of a percentage point by the central banks of Saudi Arabia, Kuwait and Bahrain.
Certificates of Deposit are the monetary policy instrument used by the UAE central bank through which changes in interest rates are transmitted.
Commercial bankers expect, Oman and, possibly Qatar, to follow suit.
Earlier, the US central bank lifted the range of its benchmark interest rate by a quarter of a percentage point to 0.25%-0.50% - its first rate hike in nine years.
Five of the six Gulf oil exporting states peg their currencies to the US dollar, while the sixth, Kuwait, ties its dinar to a basket dominated by the dollar.
The plunge of oil prices since last year has started to put pressure on those pegs by slashing governments’ oil revenues and pushing the current account balances of some countries into deficit. Now the rise of US interest rates threatens to increase the pressure by sucking funds out of the Gulf.
This threat appeared to explain the speed with which Gulf central banks reacted to the US hike. Saudi Arabia’s central bank, quoted by state news agency SPA, said it was responding to “developments in local and international financial markets”.
The Saudi central bank raised its reverse repurchase rate, the rate at which commercial banks deposit money with the central bank, to 0.5 percentage point. That should limit the incentive for the banks to move money overseas in search of higher returns.
Meanwhile Kuwait’s central bank raised its discount rate by 0.25 percentage point to 2.25%. State news agency KUNA quoted the central bank governor as saying he was acting “to guarantee the currency’s competitiveness and attractiveness”.
The interest rate rises in the Gulf, and further rises that are likely to occur if the US continues tightening monetary policy next year, come at a tough time for the region.
Economies are slowing because of low oil prices, while money market conditions are tightening as flows of fresh oil revenues into commercial banks decrease and governments issue bonds to fund budget deficits, threatening to squeeze lending to companies and consumers.
The Saudi central bank said it was keeping its repurchase rate, which it uses to lend money to banks, unchanged at 2.00% on Wednesday - a signal that it is trying to prevent liquidity at banks from deteriorating too rapidly.
The Qatar Central Bank has indicated it may delay any rate rise.

Gulf markets keep faith in FX pegs after Fed hike

Reuters
Dubai

Financial markets in the Gulf reacted calmly yesterday to the first US interest rate hike in nine years, suggesting most investors think the region can defend its currency pegs to the dollar for the foreseeable future.
The US Federal Reserve lifted the range for its benchmark interest rate by a quarter of a percentage point on Wednesday, threatening to suck funds out of the Gulf and adding to pressure on the currencies of the region’s wealthy energy exporters.
Short-term money market rates in the Gulf rose moderately yesterday but currencies barely moved in the forward foreign exchange market, while bond prices were steady.
Banking stocks in the Saudi Arabia and the UAE rose as investors bet that higher interest rates at home and abroad would expand banks’ lending margins.
Fund managers said the markets’ response showed investors believed the Gulf could ride out an era of rising interest rates, even though tighter credit promises to combine with low oil prices to slow economic growth.
Sergey Dergachev, senior portfolio manager for emerging market debt at Union Investment Privatfonds in Germany, said the speedy action by Gulf central banks following the Fed decision had helped to quell market jitters.
“The strong and swift response, especially by Saudi, is a signal to the market that pegs will be maintained, and all rumours about pegs collapsing are far-fetched,” he said.
The money markets’ reaction suggested a large proportion of the initial interest rate hikes had already been factored into the markets.
After the Saudi central bank raised its reverse repurchase rate by 0.25 percentage point, the three-month Saudi interbank offered rate climbed 10 basis points yesterday to 1.37%, its highest level since January 2009.
Interbank money rates in the UAE and Kuwait rose by smaller margins.
“Gulf money markets are more clued on to local liquidity conditions, as the rise in overnight rates in the past quarter has highlighted, and do not view Fed policy as a game changer - at least not in the current expected trajectory,” said Anirban Kundu, head of investment advisory services at Saudi Fransi Capital.
Nevertheless, some analysts said tightening US monetary policy could still cause volatility in Gulf markets in future, as Gulf central banks could be pressured into imitating US rate hikes even as their economies slowed. Many analysts expect two or three further US rate rises in 2016.