Standard Chartered said today in an economic note that while the Central Bank is apparently considering cutting its repo rate (it's now at 1 per cent), that won't necessarily work to drive down interest rates in the broader economy:
The signals coming from policy makers so far are indicative of their awareness of the issues affecting the economy. It is, however, important to appreciate that it is the market interest rates in the economy (i.e. lending rates and deposit rates) that need to drop in order to stimulate the economy. If we only see policy and interbank rates softening without those leading to lower market interest rates the benefits to the economy will be limited.
It's not clear to me why a lower repo rate won't lower interest rates, though Standard Chartered seems to say later in its report that it's because "loans in the banking sector" exceed deposits by Dh110bn.
I don't see why this is necessarily so. Banks are overleveraged in relation to their deposits. Fine. But won't a lower repo rate cause them to borrow more heavily from the central bank? And when banks borrow from the central bank through the discount window, doesn't that increase reserves? Don't more reserves tend to translate into lower interest rates?
The report says the low repo rate is "being perceived as a temporary facility and not fully taken up by banks". Maybe I need to take a course in macroeconomics, but I just don't get it. Are banks really afraid of dipping into repo money merely because of perceptions and the stigma of doing so? Thoughts, anyone?
Infobox
Western Region Asia Cup Qualifier, Al Amerat, Oman
The two finalists advance to the next stage of qualifying, in Malaysia in August
Results
UAE beat Iran by 10 wickets
Kuwait beat Saudi Arabia by eight wickets
Oman beat Bahrain by nine wickets
Qatar beat Maldives by 106 runs
Monday fixtures
UAE v Kuwait, Iran v Saudi Arabia, Oman v Qatar, Maldives v Bahrain
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