Kuwait cuts rates as Gulf seeks to defrost credit

DUBAI // Kuwait's central bank reduced its benchmark discount rate on Wednesday following a substantial US rate cut, in the latest signal that Gulf oil producers want to defrost credit markets to keep their economies growing. The Kuwait central bank slashed its key policy rate by 50 basis points to 3.75 per cent, following a similar cut in Saudi Arabia on Tuesday that took the kingdom's policy lending rate to 2.5 per cent.

Kuwait is the only Gulf country that does not peg its currency to the US dollar, instead tracking it against a basket of currencies weighted to the US currency. The central bank also reduced its one-month repurchase rate to 2.5 per cent from 3 per cent on Wednesday, a day after the Fed chopped interest rates to between zero and 0.25 per cent. The UAE kept its overnight repurchase rate at 1.5 per cent on Wednesday. The central bank governor said on Tuesday the Gulf state would not match any Fed cut after it refrained from matching the last Fed cut in late October.

"In such a troubled global environment, the link between Gulf and US monetary policy is far weaker than in normal times," said Simon Williams, senior economist at HSBC in Dubai. Gulf central banks have been cutting lending rates since October as they strive to encourage private-sector borrowing during a global economic slowdown that has put the brakes on an oil-fuelled regional economic boom. Oil prices have slumped about $100 a barrel since hitting a record above $147 a barrel in July.

A downturn in global energy demand and a slowdown in consumer demand at home mean Gulf economies are poised for a major slowdown next year. "Credit is one of the challenges of the financial sector right now," said Faisal Hasan, senior financial analyst at Kuwait's Global Investment House. "The central bank wants to infuse liquidity into the system, it is taking cues from the international markets."

Kuwait's central bank has slashed its benchmark rate by 200 basis points since the credit crisis intensified in October and revamped monetary policy tools last month by introducing new repurchase agreements to give banks more access to short-term funding. The moves have helped bring down Kuwaiti market rates. The three-month Kuwait Interbank Offered Rate has fallen more than 170 basis points since the beginning of October.

Elsewhere in the Gulf, Oman's central bank ? which sets interest rates on a weekly basis ? cut its repurchase rate by 89 basis points to 1.53 per cent, effective Wednesday. *Reuters