Markets reject rate cuts

Global markets fall sharply despite some extraordinary efforts to buoy confidence.

The European Central Bank cut its benchmark lending rate by half a percentage point to 3.25 per cent, in line with expectations.

Global markets fell sharply today despite some extraordinary efforts to buoy confidence, including the Bank of England cutting interest rates to their lowest level in more than half a century. An announced cash injection of Dh25 billion (US6.8bn) into UAE banks failed to lift local markets, although it appeared to help loosen credit conditions. "Weak economic data coming out of the US and dismal corporate guidance from Asia are reminding investors of realities that still exist in various economies," said Ali Khan, the head of equity trading at Arqaam Capital, based in Dubai. "The Gulf region isn't immune to the global trends."

The Dubai Financial Market's index led GCC bourses lower, closing down 4.1 per cent. The Abu Dhabi Securities Exchange index shed 3.31 per cent of its value. The rest of the GCC lost value with the exception of the Saudi Tadawul, which closed up 0.64 per cent. Kuwait's stock index reached its lowest level since February last year, closing down 1.13 per cent. Most Asian and European markets fell between 2 per cent and 5 per cent.

The Ministry of Finance will inject a further Dh25bn into the local banking system next week, in the second instalment of a total Dh70bn package promised to banks, it announced today. The extra funds were intended to help banks extend loans to large companies that needed to repay debt or fund their operations in the coming months, analysts said. Companies have faced concern they would be unable to borrow enough from international lenders to repay debts and finance crucial infrastructure projects due to the global credit shortage. "Increasing its deposits with banks are bound to help banks circumvent some of their funding pressures right now," said Mohamed Jaber, an economist at Morgan Stanley in London. "Access to international foreign credit has dried up."

The Bank of England, faced with a slumping housing market, a decline in manufacturing and increased unemployment, surprised markets making the biggest rate cut since 1981. It cut rates 1.5 percentage points to 3 per cent. Matthew Sharratt, a UK economist at Bank of America, echoed widespread sentiment in calling the British cut "astonishing". Jonathan Loynes of Capital Economics called it "spectacular", but said rates needed to be even lower, perhaps below 1 per cent. The move, which slashed rates to a level not seen since 1955, sent the pound down more than 1 per cent against the dollar to $1.5722.

The European Central Bank also cut its benchmark lending rate by half a percentage point to 3.25 per cent, in line with analyst expectations. The terms of the UAE's second cash injection will be similar to an earlier round, according to a release from the Ministry of Finance and published on the WAM news agency website. As of Wednesday, several banks said they had received portions of the government's first instalment, including Emirates NBD, National Bank of Abu Dhabi, and Abu Dhabi Commercial Bank. The ministry began distributing the first instalment of Dh25bn on Oct 23.

The Ministry of Finance said it would monitor banks to ensure they used the funds to finance trade and complete projects already under construction, rather than on "speculative" activities. Since September, up to Dh120bn of emergency government funds have been made available to local banks. today, interbank lending rates, which indicate the severity of the local credit crunch, fell below 4.5 per cent for the first time in almost a month.

In a separate announcement today, the Central Bank also said it would begin offering local banks more immediate access to dollars in exchange for dirhams, to help them better cope with the lack of international dollar-denominated funding. The new measure "will help a bank cover any immediate or urgent commitments. They will be able to cover them, rather than going chasing the market," a banker in Abu Dhabi said. *with agencies [e-mail] [e-mail]