UAE holds interest rates while Saudi cuts

Saudi Arabia slashes interest rates today ahead of a US Federal Reserve policy announcement.

RIYADH/ABU DHABI // Saudi Arabia slashed interest rates today ahead of a US Federal Reserve policy announcement as it strives to boost liquidity. The UAE, however, said it would not ease rates for now. The global financial meltdown has put the brakes on a six-year oil-fuelled boom across the Gulf, prompting policymakers to take a slew of measures to defrost money markets and restore investor confidence.

In the latest step today, the Saudi Arabian Monetary Agency (SAMA) reduced its repurchase rate by 50 basis points to 2.5 per cent, the fourth reduction in its benchmark lending rate since the global financial crisis intensified in October. SAMA also cut its deposit rate, the reverse repurchase rate, for the first time since April to 1.5 per cent from 2 per cent, saying the cuts aimed to ensure adequate liquidity to meet domestic credit demands.

"The central bank is concerned the private sector won't be able to follow through with project financing commitments," said Paul Gamble, head of research at Riyadh-based Jadwa Investment. "They really want to send a signal to the banks that they should make sure they will lend." Today's cuts by the Fed is expected to be 50 basis points to 0.5 per cent. Most states in the oil-exporting Gulf have tended to shadow American interest rate policy to maintain the relative value of their dollar-pegged currencies.

But in the past few months, Gulf central banks have been cutting lending interest rates more than usual as they strive to defrost interbank markets and encourage private sector borrowing to keep their economies growing during an oil price slump. The Gulf had been keeping lending rates high as it battled record inflation this year and last. With inflationary pressures receding, the emphasis has shifted to alleviating the impact of the global financial crisis by slashing interest rates, guaranteeing bank deposits, supporting stock markets and pouring funds into banking systems.

The UAE has been particularly active, with the central bank and finance ministry together launching Dh120 billion (US$33 billion) of emergency funding since September to help banks cope with tight credit conditions. The UAE minister of state for finance also reaffirmed today the government's promise to guarantee bank deposits, and said a law would be enacted soon to entrench that right. But while three-month Saudi market rates have fallen more than 160 basis points in the past month as a result of policy responses, the three-month Emirates Interbank Offered Rate has held around 4.4 per cent.

"No, we will not cut", announced the UAE Central Bank Governor Sultan Nasser al Suweidi in the UAE capital when asked if the country would match today's likely Fed rate cut. That would mark the second time since late October that the UAE refrains from mirroring the Fed. Its benchmark overnight repurchase rate is 1.5 per cent - notably lower than the Fed's expected cut to 0.5 per cent.

"The UAE benchmark lending rate is substantially below the lending rates of other GCC central banks... and any cuts in the benchmark rate will have limited impact on reducing the interbank rate," EFG-Hermes said today The Gulf has massive infrastructure projects under way designed to diversify its economy away from relying on oil export revenues. Oil prices have tumbled more than $100 a barrel since hitting record levels above $147 a barrel in July.

Many of these projects are public-private partnerships ? but private investors are finding it difficult during the global credit crunch to access abundant and cheap funds. "By bringing down both rates, SAMA is trying to force aggressively down the cost of borrowing for Saudi corporates," said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi affiliate. The three-month Saudi Interbank Offered Rate SAIBOR= fell to 3.02125 per cent today from 3.4425 per cent yesterday.

SAMA's move should reduce the spread between LIBOR and SAIBOR which means the cost of borrowing will fall and the opportunity for arbitrage deals by Saudi banks declines. *Reuters