Central Bank opens fund window

The UAE central bank launch measures today to ease tensions in the money markets.

The UAE Central Bank launched measures today to ease tensions in the money markets, giving banks access to short-term funds as Gulf authorities sought to stave off effects from the credit crisis. The moves come after the Central Bank said on Monday it would launch a Dh50 billion emergency facility to address increasing tension in the money markets. "This is a temporary measure to give banks some extra liquidity in the short term," said one Dubai-based banker.

The facility aims to reassure banks that ample funds will be available to keep the financial system functioning, but at a cost high enough to promote prudent lending and a gentle slowdown in loan growth. Under the programme, banks can borrow an amount equivalent to their required reserves at the standard repo rate plus two percentage points. The repo rate was two per cent on Thursday. Banks borrowing more than their reserve level need to pay the repo rate plus five percentage points, according to a circular released to banks late last night. "Banks now know that the liquidity is there but there is a cost for that liquidity," said Marios Maratheftis, the regional head of research at Standard Chartered Bank.

"The worst thing you can have in this global environment is uncertainty. The central bank wants to remove uncertainty from the market. "It also wants to strike a balance because you don't want to keep credit growth at these levels. Banks should slow down their credit growth but you need an orderly slowdown." Credit growth has spiralled in the UAE as five years of rising oil prices fuel an economic boom.

Gulf states outside the UAE said yesterday they would be ready to provide liquidity to help local lenders resist a global financial crisis but saw no need to step in yet and instead welcomed a moderation in credit growth. Interbank lending rates have risen across the world's biggest oil-exporting region as a global liquidity crunch has left banks struggling to finance major infrastructure, property and industrial projects during an economic boom.

* Reuters