UAE Central Bank Cuts Key Interest Rate

Bankers said the central bank’s move was aimed at helping local banks to get cheaper access to funds and help them lend money to consumers and investors to boost consumption and investment.

Central banks across the world cut their key interest rates by half a percentage point in a coordinated move to help ease a credit crunch that has hit financial markets.

According to a Reuters report, the UAE Central Bank has also cut the borrowing rate on its emergency facility to 1.5 percentage points over the repurchase rate from 3 percentage points.

Last month, the UAE Central Bank announced several measures to give banks access to short-term funds due to tight interbank lending conditions in the wake of the global credit crisis. It introduced a Dh50 billion fund that offered much needed liquidity to banks.

Tight liquidity condition in the local market has pushed up Emirates Interbank Offered Rates (EIBOR) — the rate at which banks lend and borrow from each other. From just over 3 per cent before Eid holidays, 3-month EIBOR closed at 4.6 per cent on Wednesday.

Dr Giyas Gokkent, chief economist at National Bank of Abu Dhabi, told Khaleej Times that historically the 3-month EIBOR had always tracked Fed funds target rate but this trend had changed a few months ago as the liquidity evaporated in the UAE.

“The monetary policy has been accommodative but a 50 basis point cut might not ease liquidity concerns,” he said and added the Dh50 billion credit facility announced last month came with a lot of strings attached to it.

“The UAE central bank has to cut reserve requirements of banks. This will free up liquidity and the sovereign wealth funds can also be asked to deposit cash in the local banks just as Kuwait did yesterday,” Gokkent said.

Analysts said global coordinated rate cuts by major central banks might help to lift investor sentiment.

Marios Maratheftis, head of regional research at Standard Chartered Bank, said that even if GCC bloc countries are feeling the effects of the global liquidity crunch, it is important to appreciate some areas of strengths in the region.