Gulf Central Banks Raise Rates as Fed Benchmark Hits 22-Year High
The central banks of the UAE, Saudi Arabia, Bahrain, Kuwait, Oman, and Qatar have responded to the US Federal Reserve's actions by raising their benchmark borrowing rates in an attempt to tackle inflation and restore price stability.
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Gulf Central Banks Raise Rates Amid US Federal Reserve's Efforts to Curb Inflation
The Federal Reserve recently increased its policy rate by 25 basis points, marking the 11th hike since March 2022 and reaching the highest rate since 2001. Their goal is to bring inflation down to the targeted 2 percent range after reaching a four-decade high in June 2022. Despite inflation slowing in June, the Fed remains focused on addressing wage growth, which continues to be a concern driving inflation.
GCC Central Banks and Pegged Currencies
Most central banks in the Gulf Cooperation Council (GCC) countries align their policy rate movements with the US Federal Reserve's decisions due to their currencies being pegged to the US dollar. However, Kuwait, an exception in the bloc, pegs its dinar to a basket of currencies. In response to the Fed's actions, the Saudi Central Bank raised its repurchase agreement rate and reverse repo rate, while the UAE Central Bank raised its base rate for the overnight deposit facility. This move reflects the GCC countries' interconnectedness with global economic developments and their response to inflationary pressures.
UAE Economy Shows Resilience
The UAE's economy, the second-largest in the Arab world, showcased robust growth of 7.9 percent last year, bolstered by the non-oil sector's performance and its ongoing diversification efforts. The health of the non-oil private sector has consistently improved over the past survey periods, indicating a positive trend in economic activity. While inflation in the Emirates was at 4.8 percent in 2022, it is projected to decline to 3.1 percent in 2023 and 2.6 percent in 2024, largely due to factors like lower energy and food prices. The IMF's global inflation estimates still indicate higher rates, exceeding central banks' 2 percent target.
GCC Central Banks' Actions
The Central Bank of Bahrain, the Central Bank of Kuwait, the Central Bank of Oman, and the Central Bank of Qatar have all taken steps to adjust their rates in line with the US Federal Reserve's actions. Bahrain raised its key rate on one-week deposits, while Kuwait raised its discount rate. Oman increased its repo rate for local banks, and Qatar raised its repo rate and deposit rate. These moves reflect their commitment to managing inflationary pressures and maintaining stability within their economies.
Global Economic Outlook
Moody's Analytics and the IMF offer differing forecasts for the US and global economies. While the US economy is expected to slow, it is not anticipated to enter a recession. The IMF predicts modest growth for the US, while Moody's Analytics projects a slowdown in global economic growth, with additional negative shocks potentially affecting forecast projections. Overall, central banks worldwide continue to monitor economic developments closely to respond appropriately to changing conditions.
