Gulf central banks raise interest rates after Fed's quarter-point increase

US regulator's 25 bps increase in its key policy rate is the smallest since last March, after inflation eased from a four-decade high in 2022

The Abu Dhabi skyline. Most GCC central banks mirror the Fed's rate moves due to their currencies being pegged to the dollar. Photo: Abu Dhabi Tourism

The central banks of the UAE, Saudi Arabia and Bahrain raised their benchmark borrowing rates after the US Federal Reserve raised its key interest rate at a more moderate level in its first policy decision of the year.

The Fed increased the policy rate by 25 basis points as it continues to push to bring inflation down towards its target range of 2 per cent and restore price stability.

This is the eighth rate increase and the smallest in the federal funds target rate range since the US central bank started raising rates last March, which included half and three-quarter point rate increases. It also pushes rates in the US to their highest since the 2008 financial crisis.

The world's largest economy is now expected to avoid sliding into a recession in 2023 as inflation has eased and companies have cut thousands of jobs in 2022 and at the start of this year, helping to cool the job market and reduce prices.

On Tuesday, the US Labour Department's employment cost index showed that inflation continued to outpace wage growth in most US cities.

Annually, wages and salaries rose by 5.1 per cent in the 12 months through December, compared with an annual inflation rate of 6.5 per cent in December.

While inflation eased from 7.1 per cent in November, the Fed could continue to raise interest rates further.

“Ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 per cent over time,” the Federal Open Market Committee said.

“In determining the extent of future increases in the target range, the committee will 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.”

Most central banks in the GCC follow the Fed's policy rate moves due to their currencies being pegged to the US dollar. Kuwait is an exception in the six-member economic bloc as its dinar is linked to a basket of currencies.

The Saudi Central Bank, better known as Sama, raised its repurchase agreement (repo) rate by a quarter-point to 5.25 per cent and its reverse repo rate by a similar margin to 4.75 per cent.

The kingdom's inflation rate for 2022 was estimated at 2.6 per cent and, according to preliminary forecasts, has been forecast at 2.1 per cent in 2023, Saudi Finance Minister Mohammed Al Jadaan said in December.

The UAE Central Bank raised its base rate for the overnight deposit facility (ODF) by a quarter of a percentage point to 4.65 per cent, from 4.4 per cent, effective from Thursday.

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 Emirates — stoked by increasing energy prices, imported inflation and rising employment — was projected at 4.9 per cent in 2022, according to the Central Bank's Quarterly Economic Review 2022.

That compares with a global inflation rate of 8.8 per cent, according to the International Monetary Fund.

The Central Bank of Bahrain increased its key rate on one-week deposits by 25 bps to to 5.5 per cent “in light of the development of the international financial market and … to ensure the smooth functioning of the money markets in the kingdom”.

The Bahraini regulator also raised its interest rate on overnight deposits by a quarter-point to 5.25 per cent, and by a similar margin on its four-week deposit rate, raising it to 6.25 per cent. The lending rates were also increased by 25 bps to 6.75 per cent.

The Central Bank of Qatar decided to maintain its repo rate at 5.25 per cent. It also kept its deposit rate at 5 per cent and the lending rate at 5.5 per cent.

Last week, the Central Bank of Kuwait increased its discount rate by half a percentage point to 4 per cent effective January 26, 2023.

“This decision came in light of recent … local and international economic conditions, local monitory and banking indicators, and movements on Kuwaiti dinar interest rate in the local market, considering the changes to the interest rates on the other major currencies,” Governor Basel Al Haroon said.

“The decision also considered the various factors affecting the consumer price index to identify the factors that put pressure on prices, in view of the nature of the Kuwaiti economy's openness to the world.”

Inflation in GCC economies remained lower than the global average, benefitting from fixed exchange rates and fuel subsidies, according to the World Bank.

Global inflation is forecast to fall to 6.6 per cent in 2023 and 4.3 per cent in 2024, according to the IMF's latest forecast.

Higher oil prices and Russia's war in Ukraine exacerbated inflation in 2022.

A strong US dollar also increased the price of imports and food costs globally last year, but the currency started to depreciate in September, which is expected to help in easing inflationary pressures further in 2023.

Mena economies — which expanded by an estimated 5.7 per cent in 2022, their highest in a decade, owing to a rise in energy revenue — are projected to decelerate to 3.5 per cent in 2023 and to 2.7 per cent in 2024, according to the World Bank.

GCC economies are projected to have grown 6.9 per cent in 2022, on the back of high oil prices and higher growth rates in non-oil sectors.

Growth in GCC countries is expected to slow to 3.7 per cent in 2023 and 2.4 per cent in 2024, owing to lower oil prices.

Crude prices, which surged to a 14-year high of about $140 a barrel in March following the outbreak of the Ukraine war, are projected to fall about 16 per cent this year, according to the IMF.

They are expected to moderate to an average of $88 a barrel in 2023, primarily due to slower global growth, according to the World Bank. The IMF forecasts an average of $81.13 a barrel in 2023 and $75.36 in 2024.

Despite last year's global headwinds, the economy of the Emirates is projected to have expanded by an annual 7.6 per cent in 2022, after growing 3.8 per cent in 2021, according to the UAE Central Bank.

This marks the strongest annual expansion by the Arab world's second largest economy since 2011, propelled by higher oil prices, a robust property sector and an increase in travel and tourism that underpinned a solid rebound from the coronavirus-induced slowdown.

Advanced economies will have a more pronounced slowdown, with growth set to decline to 1.2 per cent in 2023 and 1.4 per cent in 2024, from 2.7 per cent last year and 5.2 per cent in 2021.

Nine in 10 advanced economies are expected to decelerate this year.

The US, the biggest of the group, is forecast to expand 1.4 per cent in 2023, instead of the previously estimated 1.6 per cent and down from 2 per cent last year and 5.7 per cent in 2021.