Gulf central banks raise interest rates after US Federal Reserve increase

Move is the first of many expected this year and in 2023, and is expected support the earnings of lenders in the region

The Central Bank of the UAE on Thursday increased its key interest rate in line with US Fed move. Victor Besa / The National

The central banks of the UAE, Saudi Arabia, Bahrain and Kuwait increased their benchmark interest rates after the US Federal Reserve's decision to raise its key rates to rein in inflation, which has hit a 40-year high in the world's largest economy.

Most GCC central banks follow the Fed's moves on key interest rates due to their currency peg to the US dollar, with the exception of Kuwait, whose dinar is linked to a basket of currencies.

The Saudi Central Bank raised its repo rate by a quarter of a percentage point to 1.25 per cent and the reverse repo rate by 0.25 per cent to 0.75 per cent.

The Central Bank of the UAE raised the base rate applicable to the overnight deposit facility (ODF) by a quarter of a percentage point, effective from March 17, 2022. It kept the rate applicable to borrowing short-term liquidity from the Central Bank through all standing credit facilities at 50 basis points above the base rate.

The Central Bank of Kuwait (CBK) raised is discount rate by a quarter of a percentage point to 1.75 per cent. In addition, it changed the rates of monetary policy instruments by varying percentages for the entire interest rate yield curve, up to the ten-year term. This includes repurchases, CBK bonds and tawarruq, term deposits, direct intervention instruments, as well as public debt instruments.

The Central Bank of Bahrain raised its benchmark rate on one-week deposits by 25 basis points (bps) to 1.25 per cent. The interest rate on overnight deposits was also raised by a quarter of a percentage point to 1 per cent, and the interest rate on four-week deposits by the same amount to 1.75 per cent. This is in addition to raising the interest rate imposed by the central bank on retail banks in return for lending facilities to 2.5 per cent from 2.25 per cent.

The Qatar Central Bank raised its repurchase rate by 25 basis points to 1.25 per cent. It maintained its deposit rate at its current level of 1 per cent and the lending rate at its present level of 2.5 per cent.

The Fed's 25 bps rate increase from near zero — the first since 2018 — comes amid an uncertain economic outlook and tumultuous energy and commodities markets that have been affected by Russia’s worsening military assault on Ukraine.

The US central bank signalled further increases at its six remaining meetings this year as it vies to cool the economy amid rising inflation that is at a four-decade high.

Fed policymakers led by chairman Jerome Powell said the US central bank “anticipates that ongoing increases in the target range will be appropriate”. Mr Powell has pledged to be “nimble".

The first of 25 bps increases by the Fed comes as the world comes out of the pandemic-driven slowdown, but the economic outlook is clouded by mounting uncertainty amid the raging war in Ukraine.

Russia’s military action has affected commodities markets — from metals to grains — and sent oil prices to a shade under $140 a barrel earlier this week.

Oil prices have retreated from a 14-year high on optimism of talks between Kyiv and Moscow, prospects of an Iran nuclear deal and demand concerns in China as the world's second largest economy faces a surge in Covid-19 cases.

Brent, the global benchmark for two thirds of the world's oil, was trading 1.08 per cent higher at $99.08 a barrel at 7.06am UAE time on Thursday while West Texas Intermediate, the gauge that tracks US crude, was up 1.22 per cent at $96.20 a barrel.

Last week, the International Monetary Fund said it expects to lower its global growth projections as the Russian military offensive in Ukraine is expected to severely dent business and consumer confidence, forcing global trade to contract this year.

The fund has already lowered its global growth projection for 2022 to 4.4 per cent. The estimate in January was half a percentage point lower than its October 2021 projection on weaker economic momentum in the US and China amid rising inflation and higher energy prices.

Goldman Sachs economists and other Wall Street analysts expect the Fed to lift the benchmark by 25 basis points five times this year, pushing it to between 1.25 per cent and 1.5 per cent by the end of the year.

British lender Standard Chartered expects the US central bank to increase rates six times, or possibly more, at 25 bps instalments, depending on the pace of inflation and other factors this year and the next, its global chairman Jose Vinals told The National this month.

Noting inflation was high and may accelerate as a result of the Ukraine conflict, the Fed raised its 2022 forecast for inflation to 4.3 per cent, from 2.6 per cent.

“The dot plots show that the Fed is expecting to raise rates at every meeting going forwarded,” said Edward Moya, a senior market analyst at Oanda.

“The Fed has positioned itself to aggressively tackle inflation with half-point rate increases on the table and a potential balance sheet run-off kickoff that could happen as early as May.”

The series of rates increases by the Fed this year and the next, and matching moves by the UAE Central Bank will boost the profitability of UAE lenders, S&P Global Ratings said in February.

“On average, banks in the UAE will benefit,” S&P said. “We calculate a 15 per cent increase in net income and 1.4 percentage-point rise in return on equity for every 100-basis-points increase.”

UAE lenders, including First Abu Dhabi Bank, Emirates NBD and Dubai Islamic Bank, among others, have all reported higher profits for 2021.

Their incomes will return to pre-pandemic levels in the next 12 to 18 months on the back of stronger net interest income and increasing business momentum as the economy continues to rebound, Moody’s Investors Service said in February.

"Higher Fed rates will feed into equivalent rate hikes in the UAE and Saudi Arabia, while Kuwait may not follow suit as was the case in the latest tightening cycle of 2018 because of its higher degree of flexibility in its monetary policy," EFG Hermes said.

"We expect positive net interest margin trends for GCC banks starting 2Q22," the investment bank said.

Net interest income is a metric that reflects the difference between revenue generated by a bank's interest-bearing assets and the expenses associated with paying on its interest-bearing liabilities.

"Higher policy rates will feed into higher corporate lending yields over 3-6 months, while on the funding side, most banks will benefit from current account savings accounts deposits, largely insensitive (demand deposits) or very little affected (savings deposits) by rate hikes," EFG Hermes said.