GCC central banks raise interest rates after Fed's fourth consecutive 75 bps increase

The US regulator raised its key policy rate for the sixth time this year as it aims to fight inflation, which is at a four-decade high

The Dubai skyline. Inflation in the UAE is relatively low, compared with other parts of the world. AFP

The central banks of the UAE, Saudi Arabia, Bahrain and Qatar raised their benchmark borrowing rates after the US Federal Reserve increased its key rate for the sixth time this year to combat inflation, which is at historic levels, and restore price stability.

The Fed on Wednesday raised the policy rate for a fourth consecutive time by 75 basis points as it aims to bring inflation down towards its target range of 2 per cent.

The latest Fed move brings the Federal Open Market Committee's short-term rate between 3.75 per cent and 4 per cent, the highest level in 14 years.

The headline Consumer Price Index (CPI) in the US increased by 0.4 per cent in September, up 8.2 per cent from a year earlier.

The core CPI, which excludes food and energy, increased 6.6 per cent from a year ago, the highest level since 1982, according to Labour Department data.

The world's largest economy has returned to growth after two consecutive quarters of falling output, but recession fears loom and job creation continues apace, with total vacancies exceeding the number of unemployed Americans.

The Fed, which has faced criticism for being slow to react to rising prices and being behind the inflation curve, has doubled down on increasing interest rates at a brisk pace.

But the FOMC hinted on Wednesday that it could be ready to reduce the size of its rate increases.

Fed officials said they would take into account “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments” when making future interest rate decisions.

Fed chairman Jerome Powell said no decision had been made on whether December's meeting will bring a fifth consecutive rise of 75 bps but argued it was “very premature” to think about pausing the increases.

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 three quarters of a percentage point to 4.5 per cent and its reverse repo rate by a similar margin to 4 per cent.

The move is “in line with its objective of maintaining monetary and financial stability”, the regulator said on its website.

Annual inflation in the kingdom, the Arab world's largest economy, edged higher to 3.1 per cent in September on an annual basis, driven by rising food and beverage prices, as well as increasing transport costs.

Inflation edged up from a 3 per cent increase recorded in September, according to Saudi Arabia’s General Authority for Statistics (Gastat).

Saudi Arabia's economy expanded 8.6 per cent in the third quarter of 2022, driven by higher oil prices and government reforms. Growth in three months to the end of September was up from the 6.8 per cent recorded a year ago, Gastat said in its flash estimates report last week.

Saudi Arabia’s GDP is forecast to expand 7.6 per cent this year after growing by 3.2 per cent in 2021, according to the International Monetary Fund, while Saudi investment bank Jadwa Investment estimates output this year at 8.7 per cent and the OECD projects growth of 9.9 per cent.

The IMF expects inflation in Saudi Arabia to remain contained at 2.8 per cent in 2022 as its central bank tightens monetary policy in line with the US Federal Reserve.

Globally, the fund forecasts inflation to reach 5.7 per cent in advanced economies and 8.7 per cent in emerging market and developing economies this year.

The UAE Central Bank also increased its base rate for the overnight deposit facility (ODF) by three quarters of a percentage point.

It maintained the rate applicable to borrowing short-term liquidity from the regulator through all standing credit facilities at 50 bps above the base rate, the regulator said on Wednesday.

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.

Inflation in the UAE is relatively low, compared with other parts of the world. The CPI reading increased by 3.4 per cent during the first quarter of 2022, compared with 0.6 per cent and 2.3 per cent in the third and fourth quarters of 2021, respectively.

Inflation in the Emirates is projected to reach 5.6 per cent in 2022, according to the UAE Central Bank.

The Central Bank of Kuwait kept its policy rate unchanged amid a decline in inflation, which dropped to 3.19 per cent in September after hitting a record of 4.71 per cent in April.

The Kuwaiti regulator said it “continuously monitors all international economic, monetary and geopolitical developments, and their impact on the global economic conditions”.

“In light of these developments and their repercussions and based on the requirements and conditions of the unique nature of each economy, including our national economy, the CBK affirms that the available local economic and financial data and information confirm continued soundness and resilience of the monetary and financial stability conditions in Kuwait,” it said on its website.

The Central Bank of Bahrain increased its key rate on one-week deposits by 75 bps to 4.75 per cent “in light of the development of the international financial market”.

The Bahraini regulator also raised its interest rate on overnight deposits to 4.5 per cent, the four-week deposit rate to 5.5 per cent and the lending rates to 6 per cent.

“The CBB continues to monitor global and local market developments closely in order to take any further necessary actions to maintain monetary and financial stability in the kingdom,” it said.

The Central Bank of Qatar also raised its repo rate by 75 bps to 4.75 per cent. It raised its deposit rate by three quarters of a percentage point to 4.5 per cent and the lending rate by an equal amount to 5 per cent.

Last month, the International Monetary Fund warned of a global cost of living crisis as the world economy continues to be affected by the war in Ukraine, surging inflation and a slowdown in the Chinese economy.

The fund maintained its global economic estimate for this year at 3.2 per cent, after a 6 per cent expansion in 2021, but cut the 2023 forecast to 2.7 per cent — 0.2 percentage points lower than the July forecast.

The stronger dollar has increased the price of imports and food costs globally, with rising inflation prompting higher interest rates from central banks around the world as they tighten monetary policy to restore price stability.

Surging oil and gas prices have also stoked the already rising inflation.

Brent, the benchmark for more than two thirds of the world crude, rose to a notch under $140 a barrel in March. It is down about 30 per cent from its highs in June and is trading above $90 a barrel.

The impact of higher energy prices and shrinking consumer spending power on economic growth has also hit US stocks, plunging markets into bear territory.

The Russia-Ukraine conflict has exacerbated the coronavirus-induced slowdown, upending commodity markets and disrupting global trade, which will keep food and energy prices at “historically high levels” until 2024, the World Bank said in May.