Most GCC Central banks likely to mimic Fed as it prepares to raise interest rates

Fed is forecast to hike the key interest rates when it meets today

ABU DHABI, UNITED ARAB EMIRATES - May 20, 2009: The front lobby of the Central Bank of the United Arab Emirates. 
( Ryan Carter / The National ) *** Local Caption ***  RC007-CentralBank.JPGRC007-CentralBank.JPGRC007-CentralBank.JPG

Most central banks in the six-member economic bloc of GCC are expected to follow the US Federal Reserve in raising their benchmark lending rates this week, according to analysts.

Given the sustained up-tick in US inflation in recent months, economic momentum and robust labour market conditions, the Fed is likely to raise the key interest rates when it meets on June 12. This will be the second rate hike by the Fed this year, which will be part of at least two and possibly three more rate increases in 2018, analysts said.

“We see most GCC central banks raising their benchmark rates in line with the Fed [this time],” Monica Malik, the chief economist at Abu Dhabi Commercial Bank said in a note released on Monday.

Central banks in the region don’t always raise or cut rates on each specific occasion when the Federal Reserve does, but they usually follow it in its broad outline over the long run.

In its policy meeting, the Fed is expected to increase the Fed Funds Target Rate (FFTR) – a key interest rate for the US -- by 25 basis points to 2 per cent and hike interest rate on excess reserves by 20 bps to 1.95 per cent, according to an ADCB note.

The UAE central bank is expected to increase its repo rate by 25 bps to 2.25 per cent, mimicking the Fed’s expected hike, Ms Malik said. In Saudi Arabia, the region’s biggest economy, the central bank is also likely to hike by the same magnitude, maintaining the 50 bps spread between its repo rate and the FFTR, she noted.

“We envisage that Qatar will again keep its benchmark lending rates steady at 5 per cent to limit upside pressure on market lending rates, especially as there is still a margin with the FFTR,” Ms Malik added.

The UAE's central bank raised its key interest rate by 25 bps following the Fed’s move in March, increasing the rate on the certificate of deposits, which it uses as monetary policy instrument, to 2 per cent. The central bank of Kuwait hiked its discount rate by 25 bps to 2.75 per cent; Qatar’s central bank raised its deposit rate by 25 bps to 1.75 per cent but left its lending rates unchanged, while the Saudi Arabian Monetary Authority raised its benchmark rate by 25 bps just ahead of the Fed March hike.


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However, rising rates come at a time when the global economic growth is being tested by escalating trade tensions between the US, its European Union counterparts, Canada, Mexico and China. The International Monetary Fund and the World Trade Organisation have already voiced concern about the impact of tit-for-tat trade tariffs on global commerce.

There are also concerns about the impact of Fed rate hikes on some of the emerging market economies, which may struggle in the wake of higher US borrowing costs.

The energy-dependent economies of the Gulf region that are mostly pegged to the US dollar, however, are better prepared to absorb the Fed hikes as they recover from a three-year oil price slump.

"I think it [rate hike] is so well flagged that most people are reasonably prepared," Vince Cook, the chief executive of National Bank of Fujairah, told The National in an interview on Monday. "I don't think it's going to be a major challenge for anyone. It's something that we are all absorbing and planning for anyway."

From the banks in the UAE perspective, “we have a little bit more room to play with deposit rates and lending rates," he said.