GCC interest rates approach record lows

The region's central banks were forced into the half a percentage point cut because most have a currency peg.

Interest rates in the Gulf region are now approaching record lows after the Federal Reserve's cuts, to which most have their currencies pegged. With the exception of Kuwait, which floats its currency against a basket of foreign money, the region must move interest rates in tandem with the US. Kuwait acted independently yesterday by slashing its key rate by 1.25 per cent.

The authorities are now hoping cheaper lending conditions will encourage banks to start welcoming borrowers again. Only the Saudi market was still open in the Gulf and able to react to the cuts, halving its losses from six per cent during intraday trade, to 2.76 per cent at the close. The rest of the GCC had closed by the time of the coordinated rate cuts, but the Western markets staged a small relief rally. The Dow Jones Industrial Average climbed 120 points green in the opening 30 minutes of trade.

One leading economist said yesterday that the cuts will have little effect, and that, just like the false dawn of the much-heralded $700bn US bailout, it should certainly not be seen as a panacea. The economist, who did not want to be named, said: "This will not necessarily improve lending over here. With the balance sheet of banks this is certainly a step in the right direction, but this is not a solution of the problem."

He added that while earlier this year the rate cut would be considered highly inflationary, the severe economic downturn is likely to push down price rises and neutralise any such effect. The question now is what effect the collapsing stock market values will have on individual companies, especially in terms of their credit ratings - plunging stock levels often result in a downgrade because stock is used as collateral, and a downgrade in turn makes it harder to borrow capital.

Ali Khan, executive director of Arqaam Capital in Dubai, said this has not been happening much in the country, citing the example of ports operator DP World which has plummeted in value over the past year but has not been downgraded. [e-mail]