GCC central banks raise interest rates after Fed's final increase of year

The US regulator increased its key policy rate by half a percentage point to fight inflation, which hit a four-decade high in 2022

The Abu Dhabi skyline. The UAE economy is set grow at its fastest pace in more than a decade this year. Bloomberg

The central banks of the UAE, Saudi Arabia, Bahrain and Qatar raised their benchmark borrowing rates after the US Federal Reserve increased its key interest rate for the seventh time in 2022 to restore price stability and tame inflation that hit a four-decade high this year.

The Fed raised the policy rate by 50 basis points, a softer increase than the previous four of 75 bps each after consumer prices began to ease. This brings interest rates to a range of 4.25 per cent and 4.50 per cent, the highest level in 15 years.

Inflation in the world's largest economy fell to 7.1 per cent in November, from 7.7 per cent in October, after soaring to a pandemic high of 9.1 per cent in June.

The US central bank aims to bring inflation down from a 40-year high towards its target range of 2 per cent.

The moderation in the consumer price growth was lower than the consensus forecast of 7.3 per cent, marking the slowest pace in price growth since December 2021 and signalling the possibility that inflation in the world's largest economy may have peaked after significant interest rates increases.

The economy grew by an annual 2.9 per cent in the third quarter after two consecutive quarters of falling output but recession fears loom and job creation continues apace, with vacancies exceeding the number of unemployed Americans.

“The downturn in interest-rate sensitive sectors, rising excess inventories, lower energy prices and easing supply constraints have reduced the inflation momentum in the US and should allow the Fed to declare victory over inflation in the coming months,” said David Kohl, chief economist at Julius Baer.

Most central banks in the GCC follow the Fed's policy rate moves due to their currencies being pegged to the US dollar.

The Saudi Central Bank, better known as Sama, raised its repurchase agreement (repo) rate by half a percentage point to 5 per cent and its reverse repo rate by a similar margin to 4.5 per cent.

The UAE Central Bank raised the base rate applicable to the overnight deposit facility by 50 basis points to 4.4 per cent, from 3.9 per cent, effective from Thursday, it said on Wednesday.

The Emirates decided to maintain the rate applicable to borrowing short-term liquidity from the regulator through all standing credit facilities at 50 bps above the base rate.

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 UAE is relatively low, compared to other parts of the world, and is projected to reach 5.6 per cent in 2022, according to the Central Bank.

The Central Bank of Bahrain increased its key rate on one-week deposits by 50 bps to to 5.25 per cent “in light of the development of the international financial market and … to ensure the smooth functioning of the money markets”.

The Bahraini regulator also raised its interest rate on overnight deposits by half a percentage point to 5 per cent, and by a similar margin on its four-week deposit rate, raising it to 6 per cent. The lending rates were also increased by half a percentage point to 6.5 per cent.

“The CBB continues to monitor global and local market developments closely in order to take any further necessary actions to maintain monetary and financial stability in the kingdom,” it said.

The Central Bank of Qatar also raised its repo rate by 50 bps to 5.25 per cent. It raised its deposit rate by a similar margin to 5 per cent and the lending rate by an equal amount to 5.5 per cent.

In October, the International Monetary Fund warned of a global cost-of-living crisis as the world economy continues to be affected by the war in Ukraine, broadening inflation pressures and a slowdown in China.

The fund maintained its global economic estimate for this year at 3.2 per cent, after a 6 per cent expansion in 2021, but cut 2023's forecast to 2.7 per cent — 0.2 percentage points lower than the July forecast.

Global inflation is expected to hit 8.8 per cent in 2022, from 4.7 per cent in 2021, but is set to decline to 6.5 per cent in 2023, the fund said.

A stronger US dollar has increased the price of imports and food costs globally, with rising inflation prompting higher interest rates from central banks around the world as they tighten monetary policy to restore price stability.

Surging oil and gas prices, exacerbated by Russia’s war in Ukraine, have also fed into already rising inflation.

After rising to a notch under $140 a barrel in March, Bent, the benchmark for more than two thirds of the world crude, has plunged to above $70 a barrel on recession fears and demand concerns in China, the biggest importer of crude globally.

The impact on economic growth of higher energy prices and shrinking consumer spending power has also hit US stocks, plunging markets into bear territory.

The Russia-Ukraine conflict has exacerbated the slowdown from the Covid-19 pandemic, upending commodity markets and disrupting global trade, which will keep food and energy prices at “historically high levels” until 2024, the World Bank said in May.

Mena economies are set to expand 5.5 per cent this year, their fastest pace since 2016, with oil-exporting countries in the region benefitting from high hydrocarbon prices, according to the World Bank.

GCC economies are projected to expand by 6.9 per cent in 2022, driven by high oil prices, as well as higher growth rates in non-oil sectors.

Despite global headwinds, the UAE economy is set to grow more than 6 per cent this year, after an expansion of 3.8 per cent in 2021, according to the IMF.

The Arab world's second-largest economy is set to post its strongest annual expansion since 2011 after it grew by 8.4 per cent in the first three months of this year on higher oil prices and measures to mitigate the impact of the Covid-19 pandemic.

Emirates NBD forecasts that the economy will expand 7 per cent in 2022 while First Abu Dhabi Bank projects a 6.7 per cent expansion and Abu Dhabi Commercial Bank estimates growth of 6.5 per cent.

Advanced economies are expected to grow 2.4 per cent this year, compared with an earlier 2.5 per cent estimate, after expanding by 5.2 per cent in 2021, according to the IMF. They are forecast to grow 1.1 per cent in 2023.

The US, the biggest of the group, is forecast to expand by 1.6 per cent, instead of 2.3 per cent as previously estimated and down from 5.7 per cent last year, according to the fund.

However, on Wednesday the Fed lowered its growth forecast next year with the US economy now expected to expand 0.5 per cent, instead of an earlier 1.2 per cent estimate.