The central banks of UAE, Saudi Arabia, Bahrain, and Kuwait, that is, of most GCC countries, have increased their interest rates after the announcement of the US Federal Reserve’s move of rate hikes to control inflation, which resulted in a 40-year high in the world’s largest economy.
Most GCC central banks make their decisions based on the Federal Reserve’s moves as most of their currency is linked to the US dollar (exception of Kuwait). The Central Bank of UAE, in particular, has announced interest rate hikes by 25 basis points.
The Central Bank of the UAE raised the base rate applicable to the overnight deposit facility (ODF) by a quarter of a percentage point, effective from March 17, 2022. It kept the rate applicable to borrowing short-term liquidity from the Central Bank through all standing credit facilities at 50 basis points above the base rate.
The Saudi Central Bank raised its repo rate by a quarter of a percentage point to 1.25 percent and the reverse repo rate by 0.25 percent to 0.75 percent.
The Central Bank of Kuwait (CBK) raised its discount rate by a quarter of a percentage point to 1.75 percent. In addition, it changed the rates of monetary policy instruments by varying percentages for the entire interest rate yield curve, up to the ten-year term. This includes repurchases, CBK bonds, tawarruq, term deposits, direct intervention instruments, as well as public debt instruments.
The Central Bank of Bahrain raised its benchmark rate on one-week deposits by 25 basis points (bps) to 1.25 percent. The interest rate on overnight deposits was also raised by a quarter of a percentage point to 1 percent, and the interest rate on four-week deposits by the same amount to 1.75 percent. This is in addition to raising the interest rate imposed by the central bank on retail banks in return for lending facilities to 2.5 percent from 2.25 percent.
The Qatar Central Bank raised its repurchase rate by 25 basis points to 1.25 percent. It maintained its deposit rate at its current level of 1 percent and the lending rate at its present level of 2.5 percent.
The Fed’s 25 bps rate increase from near zero — the first since 2018 — comes amid an uncertain economic outlook and tumultuous energy and commodities markets that have been affected by Russia’s worsening military assault on Ukraine.
The US central bank signaled further increases at its six remaining meetings this year as it vies to cool the economy amid rising inflation that is at a four-decade high.
Fed policymakers led by chairman Jerome Powell said the US central bank “anticipates that ongoing increases in the target range will be appropriate”. Mr. Powell has pledged to be “nimble”.
The first of25 bps increases by the Fed comes as the world comes out of the pandemic-driven slowdown, but the economic outlook is clouded by mounting uncertainty amid the raging war in Ukraine.
Russia’s military action has affected commodities markets — from metals to grains — and sent oil prices to a shade under $140 a barrel earlier this week.
Oil prices have retreated from a 14-year high on optimism of talks between Kyiv and Moscow, prospects of an Iran nuclear deal, and demand concerns in China as the world’s second-largest economy faces a surge in Covid-19 cases.
Brent, the global benchmark for two-thirds of the world’s oil, was trading 1.08 percent higher at $99.08 a barrel at 7.06 am UAE time on Thursday while West Texas Intermediate, the gauge that tracks US crude, was up 1.22 percent at $96.20 a barrel.
Last week, the International Monetary Fund said it expects to lower its global growth projections as the Russian military offensive in Ukraine is expected to severely dent business and consumer confidence, forcing global trade to contract this year.
The fund has already lowered its global growth projection for 2022 to 4.4 percent. The estimate in January was half a percentage point lower than its October 2021 projection on weaker economic momentum in the US and China amid rising inflation and higher energy prices.
Goldman Sachs economists and other Wall Street analysts expect the Fed to lift the benchmark by 25 basis points five times this year, pushing it to between 1.25 percent and 1.5 percent by the end of the year.
British lender Standard Chartered expects the US central bank to increase rates six times, or possibly more, at 25 bps installments, depending on the pace of inflation and other factors this year and the next, its global chairman Jose Vinals told The National this month.
Noting inflation was high and may accelerate as a result of the Ukraine conflict, the Fed raised its 2022 forecast for inflation to 4.3 percent, from 2.6 percent.
“The dot plots show that the Fed is expecting to raise rates at every meeting going forwarded,” said Edward Moya, a senior market analyst at Oanda.
“The Fed has positioned itself to aggressively tackle inflation with half-point rate increases on the table and a potential balance sheet run-off kickoff that could happen as early as May.”
The series of rates increases by the Fed this year and the next, and matching moves by the UAE Central Bank will boost the profitability of UAE lenders, S&P Global Ratings said in February.
“On average, banks in the UAE will benefit,” S&P said. “We calculate a 15 percent increase in net income and 1.4 percentage-point rises in return on equity for every 100-basis-points increase.”
UAE lenders, including First Abu Dhabi Bank, Emirates NBD, and Dubai Islamic Bank, among others, have all reported higher profits for 2021.
Their incomes will return to pre-pandemic levels in the next 12 to 18 months on the back of stronger net interest income and increasing business momentum as the economy continues to rebound, Moody’s Investors Service said in February.
“Higher Fed rates will feed into equivalent rate hikes in the UAE and Saudi Arabia, while Kuwait may not follow suit as was the case in the latest tightening cycle of 2018 because of its higher degree of flexibility in its monetary policy,” EFG Hermes said.
“We expect positive net interest margin trends for GCC banks starting 2Q22,” the investment bank said.
Net interest income is a metric that reflects the difference between the revenue generated by a bank’s interest-bearing assets and the expenses associated with paying on its interest-bearing liabilities.
EFG Hermes concluded that most banks will be very little affected by rate hikes due to savings deposits and demand deposits schemes due to the high yields gained from the current account savings on the funding side whereas, on the lending side, these high policy rates will feed into higher corporate lending returns over the period of 3 to 6 months.
