Most Gulf central banks raised their main interest rates by three quarters of a percent on Wednesday, with the US Federal Reserve going ahead as their currencies are pegged to the dollar.
The Central Bank of Kuwait, one of only six Gulf Cooperation Council (GCC) countries that pegs its currency to a basket instead of just the dollar, has raised its key discount rate.
25 basis points (bps) to 2.5 per cent.
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The central banks of Saudi Arabia, the United Arab Emirates, Qatar and Bahrain raised their key rates by 75 bps to 3 per cent, 2.4 per cent, 3 per cent and 3.25 per cent, respectively.
“Rate hikes by GCC central banks continue to demonstrate commitment to the regional currency,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.
The addition of Kuwait’s currency basket gave it more monetary flexibility.
The Fed hike comes on top of a 75-basis-point hike last month — its biggest since 1994 — and smaller moves in May and March, as it battles a breakout of inflation’s 1980 levels.
The Saudi Central Bank returned to move in parallel with the Fed when it raised rates by 50 bps last month, distracted by the Fed’s move as it faces lower inflation than the rest of the Gulf.
“Inflation in the region is lower than in the US and therefore does not require the same magnitude of monetary tightening in the region. This is especially true for the GCC countries that introduced fuel price caps,” Malik said.
The central bank of the United Arab Emirates, the only GCC country that does not have a fuel price cap, said this month it expected 5.6 per cent inflation for 2022.
The Central Bank of Oman, the rest of the GCC country, is widely expected to follow with a similar move.
“Our forecasts are already assuming some headwinds for non-oil economic activity and credit demand in the GCC from the faster pace of interest rate hikes this cycle, especially as they build up cumulatively,” Malik said.
“However, we see that major development plans continue to drive economic activity.”
Read more: US Federal Reserve announces another major rate hike to curb inflation