Shares rally on bank's plan to reduce rates

The plan to lower interest rates to fuel economic growth pushed the bourse higher.

Shares rallied yesterday on the back of the Central Bank's plan to lower interest rates to fuel economic growth. The Dubai Financial Market (DFM) rose 1.17 per cent to 1508.05 and the Abu Dhabi Securities Index gained 2.42 per cent to end the day at 2367.91.

"News of the [potential] interest rate cut definitely affected UAE markets positively; the news is not the only reason for the rallies but it does help," said Ali Khan, the managing director at Arqaam Capital. "We're showing signs of moving off our low levels, and while this isn't happening in a massive way, it does say that regional markets are recovering." The measures to lower interest rates and reinvigorate the banking system were on the way, Sultan al Suwaidi, the Central Bank Governor, said in a media report published yesterday. These could include helping to reduce interbank lending rates or lowering the Central Bank's repurchase rate, which might increase banks' capital reserves and strengthen their ability to lend.

The repurchase rate, a benchmark rate at which commercial banks can borrow from the Central Bank, stands at 1 per cent. The UAE has in the past moved its repurchase rate in line with the US Federal Reserve as a means of maintaining the dirham's peg to the US dollar. "The rate will not be zero as is the case in the US," Mr al Suwaidi said. "We aim to introduce a low interest rate and maintain it. "We have almost finished the plan and will announce the details soon," he added, without elaborating.

The Central Bank has so far announced a total of Dh120 billion (US$32.67bn) in assistance to banks, including loans with low interest rates and cash deposits aimed at shoring up bank balance sheets and providing them with money to lend. Abu Dhabi last month injected Dh16bn into the emirate's five local banks. Also last month, the Central Bank agreed to buy $10bn in bonds to help companies in Dubai meet their financial obligations.

"Banks reacted positively to comments that liquidity is improving in the system following local and Federal Government initiatives," said Matthew Wakeman, the markets commentator at EFG Hermes. Simon Williams, the chief economist at HSBC Middle East, said the current environment, marked by a limited risk appetite and lower-than-usual cross-border flows, allowed the UAE to be more flexible when setting its repurchase rate while maintaining a constant exchange rate against the dollar.

"Right now the UAE has more flexibility than it would usually have," he said. This compares to what he called "normal times" when investors would be tempted to swap out of the US dollar and into the dirham if the UAE repo rate were higher than the Fed Funds rate. Analysts say intentions to reduce rates will trickle down to lower lending rates, which will help the recovery of the property market as mortgages become cheaper.

"Concerns still remain about the quality of assets at banks, the health of mortgage markets and the question of where liquidity will come from; but having said that, the selling in the equity markets has subsided and we're seeing pockets of selective buying happening in regional markets," said Mr Khan. On the DFM yesterday, gains were led by Emaar Properties and Shuaa Capital, which rose 2.02 per cent to Dh2.02 and 2.24 per cent to Dh0.87, respectively.

On the ADX, National Bank of Abu Dhabi, the UAE's second-largest bank by assets, advanced 5.56 per cent to Dh9.12 in its steepest intraday gain since Nov 30. Arkan Building Materials gained 8.86 per cent to Dh3.85. [e-mail] [e-mail] * with Reuters