UAE trims interest rates ahead of expected US cut

The UAE reduced its repurchase rate for a second day on Thursday, matching US interest rates after Gulf Arab rulers signalled at a summit this week they planned to keep their dollar pegs unchanged for now.

The UAE central bank trimmed the overnight repo rate by 15 basis points to 4.5%, in line with the US Federal Reserve's Fed funds rate. On Wednesday, it cut the rate - which was introduced last week - by 10 basis points.
"They are tracking the Fed," said Giyas Gokkent, head of research at National Bank of Abu Dhabi. "If you track it, investors can't make money from a difference in rates."
Dollar pegs force Gulf Arab oil producers, whose economies have surged on a near fivefold jump in oil prices since 2002, to follow US monetary policy but risk stoking inflation, already at decade-highs.

The Fed has slashed interest rates by 75 basis points since September 18 to contain the fallout of a mortgage market crisis, one of the main factors driving the dollar to life-time lows against the euro and a basket of major currencies.
UAE central bank governor Sultan Nasser Al-Suweidi said on Wednesday he would leave the peg unchanged for the "foreseeable future" after Gulf rulers agreed on Tuesday to keep any currency reform talks secret to calm markets.
"For the moment, they are sticking with the peg," said Jason Goff, head of group treasury and market sales at Emirates Bank International. "The rate is still far too low for the UAE domestic economy."
Al-Suweidi said last month he was under growing social and economic pressure to drop the peg and track a currency basket including the euro. Inflation in the second-largest Arab economy hit a 19-year high of 9.3% last year.

New Fed cut?
The UAE dirham fell for a third day on Thursday but forward rates showed investors expecting a 3% appreciation in a year.
Investors drove the dirham to a 17-year high last month after Al-Suweidi fuelled talk of an imminent revaluation.
"This reminds me of just before Kuwait changed currency policy," Gokkent said of the UAE repo rate cut. "The central bank tried to discourage people from taking positions in the local currency."
Kuwait cited imported inflation due to the US currency's slide on global markets as one of the reasons it broke ranks with its neighbours in May and dropped its peg to the US dollar.
It now tracks a currency basket comprised largely of dollars and has allowed the dinar to rise 5.49% from the May 20 move.
Wall Street investors unanimously expect the Fed to cut interest rates at its December 11 meeting, according to a November 30 Reuters poll.
As part of a new set of monetary policy tools started last week, the UAE central bank said it would allow the country's first repurchase agreements to set the rate at which it would lend funds to banks.
The rate was first set at 4.75% last Thursday, signalling at the time the central bank wanted to tighten monetary policy. (Reuters)