GCC states 'forced' to cut rates, says UAE Central Bank governor
Sultan Al-Suwaidi, the governor of the UAE Central Bank, has said that all GCC countries including Saudi Arabia would be forced to cut interest rates shortly. “All GCC central banks will be forced to cut interest rates like the decision taken by our bank,” Suwaidi told Al-Eqtisadiah daily, as reported by Arab News.
Suwaidi described cutting interest rates or revaluing a currency as “a sour medicine.” However, he said that cutting interest rates to cope with the US dollar was essential to maintain economic balance.
Qatar, Saudi Arabia, the UAE, Kuwait, Bahrain and Oman agreed in 2003 to peg their currencies to the dollar as a step towards creating a single currency by 2010. Hamad al-Sayari, governor of the Saudi Arabian Monetary Agency, conceded recently that meeting the 2010 deadline would be increasingly difficult but he also reaffirmed GCC members' commitment to the dollar peg.
Kuwait, where inflation rose to 12-year highs above 5% in March, April and May, abandoned its peg to the dollar in May saying the US currency's weakness was fuelling inflation by making some imports more expensive.
Saudi Arabia, the world’s largest oil exporter, will hold back from matching the US Federal Reserve’s 50-basis-point cut, al-Sayari said last week. “After reviewing the situation of liquidity and the economic situation we feel there is no need for a change,” he added.
Al-Sayari, explained that the Kingdom has no plan of revaluing the dollar-pegged riyal and cut interest rates. “It is not necessary for us to follow a cut in interest rate, especially when there is high liquidity...We think exchange rate stability and transparency are important for investors,” he added.
Saudi Arabia and five of its neighbours tend to track US interest-rate changes to maintain the relative value of its currency. Markets were speculating the decision could mean Saudi Arabia will follow neighbouring Kuwait and break its peg to the sliding US Dollar.
But Standard Chartered Middle East economist Steve Brice said Saudi Arabia was unlikely to break the peg to the dollar.
“At the end of the day Saudi interest rates cannot be higher than their US Dollar counterparts as this would merely encourage speculation,” said Brice.
“When push comes to shove we would expect the Saudi authorities to protect the peg, but allow interest rates to fall,” he said. “I do not think his comments change the probability, but they change the market’s perception as to the probability.”
Qatar also ruled out revaluing its dollar-pegged currency for now. "We are committed to the peg," Sheikh Abdallah bin Saud Al Thani Qatar's central bank governor said recently. Qatar, however, cut interest rates last week.
Analysts say there is agreement between GCC Central Banks on maintaining the dollar peg "for now" and to coordinate any future change of policy. " The peg is not the issue now, the main question is can you peg to the dollar and not shadow the Fed on rates and what would be the consequence if you do so ?", said an analyst in Dubai.
The UAE Central Bank changed interest rates twice during the past week as the rate of reduction reached 0.25% and the value of UAE dirham reached 3.6682 against the dollar, the highest in five years.
“As long as the currencies of GCC countries are pegged to the US dollar, they have to follow the American monetary policy. GCC monetary authorities have to be ready to face certain challenges,” Suwaidi said.
Suwaidi did not rule out the UAE Central Bank cutting interest rates for the third time if the US Federal Bank does it again. He said the GCC leaders decided to link their currencies with the dollar in order to reduce their exchange rate differences.
“Pegging to the dollar is a combined GCC decision,” the UAE official said. However, he pointed out that GCC leaders may one day decide to de-peg their currencies as a result of heavy financial losses they suffer. Source
Suwaidi described cutting interest rates or revaluing a currency as “a sour medicine.” However, he said that cutting interest rates to cope with the US dollar was essential to maintain economic balance.
Qatar, Saudi Arabia, the UAE, Kuwait, Bahrain and Oman agreed in 2003 to peg their currencies to the dollar as a step towards creating a single currency by 2010. Hamad al-Sayari, governor of the Saudi Arabian Monetary Agency, conceded recently that meeting the 2010 deadline would be increasingly difficult but he also reaffirmed GCC members' commitment to the dollar peg.
Kuwait, where inflation rose to 12-year highs above 5% in March, April and May, abandoned its peg to the dollar in May saying the US currency's weakness was fuelling inflation by making some imports more expensive.
Saudi Arabia, the world’s largest oil exporter, will hold back from matching the US Federal Reserve’s 50-basis-point cut, al-Sayari said last week. “After reviewing the situation of liquidity and the economic situation we feel there is no need for a change,” he added.
Al-Sayari, explained that the Kingdom has no plan of revaluing the dollar-pegged riyal and cut interest rates. “It is not necessary for us to follow a cut in interest rate, especially when there is high liquidity...We think exchange rate stability and transparency are important for investors,” he added.
Saudi Arabia and five of its neighbours tend to track US interest-rate changes to maintain the relative value of its currency. Markets were speculating the decision could mean Saudi Arabia will follow neighbouring Kuwait and break its peg to the sliding US Dollar.
But Standard Chartered Middle East economist Steve Brice said Saudi Arabia was unlikely to break the peg to the dollar.
“At the end of the day Saudi interest rates cannot be higher than their US Dollar counterparts as this would merely encourage speculation,” said Brice.
“When push comes to shove we would expect the Saudi authorities to protect the peg, but allow interest rates to fall,” he said. “I do not think his comments change the probability, but they change the market’s perception as to the probability.”
Qatar also ruled out revaluing its dollar-pegged currency for now. "We are committed to the peg," Sheikh Abdallah bin Saud Al Thani Qatar's central bank governor said recently. Qatar, however, cut interest rates last week.
Analysts say there is agreement between GCC Central Banks on maintaining the dollar peg "for now" and to coordinate any future change of policy. " The peg is not the issue now, the main question is can you peg to the dollar and not shadow the Fed on rates and what would be the consequence if you do so ?", said an analyst in Dubai.
The UAE Central Bank changed interest rates twice during the past week as the rate of reduction reached 0.25% and the value of UAE dirham reached 3.6682 against the dollar, the highest in five years.
“As long as the currencies of GCC countries are pegged to the US dollar, they have to follow the American monetary policy. GCC monetary authorities have to be ready to face certain challenges,” Suwaidi said.
Suwaidi did not rule out the UAE Central Bank cutting interest rates for the third time if the US Federal Bank does it again. He said the GCC leaders decided to link their currencies with the dollar in order to reduce their exchange rate differences.
“Pegging to the dollar is a combined GCC decision,” the UAE official said. However, he pointed out that GCC leaders may one day decide to de-peg their currencies as a result of heavy financial losses they suffer. Source
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