Six leading central banks including the US Federal Reserve, the European Central Bank and the Bank of England took the unprecedented step of co-ordinated interest rate cuts of half a percentage point yesterday in response to collapsing stock markets and fears of a worldwide recession.
Shares gyrated wildly as dealers weighed the positive effects of cheaper borrowing with the overwhelming wave of pessimism spreading from the financial sector to the rest of the global economy. The global rate cut follows a meltdown that has sent US stock indices heading for their biggest annual decline since 1937. The Dubai Financial Market (DFM) has fallen 25.3 per cent this week, while the Abu Dhabi Securities Exchange (ADX) is down 19.7 per cent.
"They are throwing the kitchen sink in to try to find stability," said Gregory Miller, the chief economist at SunTrust Banks in Atlanta. The other central banks to act in co-ordination were those of Sweden, Switzerland and Canada, while the Bank of China independently cut its rate by 27 basis points. Lower interest rates are meant to spur economic growth by allowing companies to borrow at a reduced rate for capital investments and bring down the cost of various consumer credit options.
The UAE central bank also reduced its benchmark interest rate in line with the Fed's decision, because the dirham is pegged to the dollar, to 1.5 per cent. But the move came too late for Gulf markets, which had already closed by the time the announcement was made. Domestic markets had another bloody day, with the DFM down 8.43 per cent and the ADX down 6.43 per cent. Other Gulf markets were equally badly hit. Only the Saudi market was still open and able to react to the cuts, recovering to temper its daily loss from six per cent to 1.49 per cent. Separately, Kuwait's central bank slashed its interest rate by 125 basis points, one of its biggest rate cuts in history. Kuwait is the only GCC currency to delink from the US dollar.
Economists at Morgan Stanley said the UAE banks were safe from the contagion laying waste to the financial sector in the US and Europe. "UAE banks remain profitable and generally well capitalised, despite the rapid increase in the size of their balance sheets," Morgan Stanley analysts said in a report issued yesterday. "The UAE's performance has been impressive and its economic outlook remains very favourable."
The dollar was the biggest beneficiary on the currency markets, rising against both the euro and the pound. By mid-afternoon New York's Dow Jones index was up roughly one per cent. * With agencies @Email:rwright@thenational.ae
