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Kuwait, UAE track Fed cuts, raise inflation prospect

(Reuters)
Filed on September 19, 2007

DUBAI/KUWAIT - Kuwait and the United Arab Emirates cut interest rates on Wednesday, following a 50 basis point reduction in the United States, raising the prospect that Gulf Arab economic growth and inflation may accelerate.

Kuwait, the Middle East’s fourth-largest oil exporter, cut its repurchase rate by 50 basis points to 4.75 percent, the central bank CBKK said, adding to its 25 basis-point cut last week. One basis point is equivalent to 0.01 percentage point.

‘The US and Gulf economic cycles are out of sync,’ said Monica Malik, Middle East economist at EFG-Hermes investment bank in Dubai. ‘Cuts will increase credit growth, liquidity and money-supply growth in the GCC, which will add to inflationary pressures.’

The UAE, which pegs its currency to the US dollar, cut its one-week, one-month and three-month certificate of deposit (CD) interest rates by 15 basis points, the central bank said. It does not have a benchmark rate.

The Gulf Cooperation Council comprises Saudi Arabia, the UAE and four other Gulf Arab oil producers in a loose economic and political bloc, with all but one—Kuwait—pegging their currencies to the dollar.

The US Federal Reserve on Tuesday agreed unanimously to cut its benchmark federal funds rate to 4.75 percent in a move to shield the world’s largest economy from a housing slump and financial turbulence. [ID:nN18433941]

GCC countries, which also include Qatar, Oman and Bahrain, tend to track US interest-rate changes, limiting their ability to fight inflation that has surged as a quadrupling in oil prices since the start of 2002 has fuelled economic growth.

Inflation highs

Inflation in Saudi Arabia, the world’s largest oil exporter, surged to a seven-year high in July on higher food prices and rents. Inflation in Kuwait was at a 12-year high in April, and in Qatar at a record 14.81 percent in March.

‘To go further than the Fed seems curious,’ Standard Chartered Middle East economist Steve Brice said of Kuwait’s 75 basis-point cumulative cut. ‘It may suggest they may want to guide interest rates even lower.’

The UAE, the second-largest Arab economy, cut the one-week CD to 4.60 percent and the one-month CD rate to 4.70 percent. AEDCDCBEM

The three-month CD rate fell 15 basis points to 4.80 percent and the six-month rate was cut by 20 basis points to 4.80 percent.

‘We’re looking at the UAE doing the whole 50 basis point cut, adjusted over a few days,’ said Brice, who is keeping his forecast for UAE inflation this year unchanged at 9.3 percent. UAE inflation surged to a 19-year high of 9.3 percent last year.

Oman, Qatar and Bahrain have so far left their interest rates unchanged.

‘We will judge what will be the impact of the cut on our market; on inflation, on interest rates and on our peg to the dollar,’ Omani Central Bank Executive President Hamood Sangour Al Zadjali told Reuters by telephone.

The central bank will consider what to do during its next working-week, which starts on Saturday, Zadjali said.

Oman, where inflation almost hit 6 percent in July, its fastest pace this year, sets its interest rates in a weekly auction.

Gulf Arab central bankers agreed at a meeting this month to develop separate policies to tackle inflation, giving them greater freedom to set interest rates.

Kuwait left the benchmark discount rate unchanged at 6.25 percent.

‘The discount rate is unchanged for the moment because the central bank wants to keep a tight lid on the growth in credit,’ said Randa Azar-Khoury, chief economist at National Bank of Kuwait.

Money supply in Kuwait, an indicator of future inflation, rose in August at the second-fastest pace this year, near a 13-year high.





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