TLDR:
GCC interest rates align with Fed
UAE maintains strong economic resilience
Trump policies may impact future Fed cuts
RIYADH (The Thursday Times) — Central banks across the GCC lowered their interest rates in response to the recent US Federal Reserve rate cut, marking a strategic move aimed at maintaining alignment with the dollar-pegged economies of the region. The Fed’s 25-basis-point reduction, which adjusted the federal funds rate from 4.75% to a range of 4.5% to 4.75%, reflects easing inflationary pressures in the US, which have inched closer to the central bank’s 2% annual target.
Impact of GCC rate cuts
The GCC, given its currency peg to the US dollar, typically mirrors the Fed’s monetary decisions. This time, the UAE’s Central Bank lowered the Overnight Deposit Facility base rate by 25 basis points, from 4.90% to 4.65%, effective immediately, signalling a controlled approach to sustaining liquidity within its economy. Saudi Arabia followed suit, reducing its repo rate to 5.25% and the reverse repo rate to 4.75%. Bahrain and Qatar also implemented similar adjustments, with Bahrain’s overnight deposit rate set at 5.25% and Qatar reducing its deposit, lending, and repo rates by 30 basis points.
Economic resilience
The UAE, due to its strategic demographics and diversified economy, remains poised to navigate higher interest rates more effectively than many other nations. This economic resilience, driven by its pivotal location and robust tourism, allows the UAE to leverage higher interest margins beneficial for its banking sector. Broader economic sectors sensitive to credit conditions, such as real estate and consumer spending, may see renewed growth through this cut, providing a support mechanism to the wider economy.
US domestic policy influence
The Fed’s rate path remains influenced by US fiscal policies, particularly if future government spending and tax strategies increase inflationary pressure. If inflation in the US were to rise, the Fed might adopt a more hawkish approach, impacting the GCC’s monetary stance due to its dollar peg. While the probability of another rate cut remains, recent market analyses suggest a measured approach from the Fed, with a potential total reduction of up to 100 basis points by 2025.
Market adjustments
Current market projections suggest the Fed could lower rates further by December, with expectations for another 25-basis-point reduction. For the GCC, such adjustments open the door to economic growth opportunities, particularly in sectors directly affected by credit availability. Despite the challenges, the economic structure of GCC states, especially the UAE, continues to exhibit resilience and adaptability to evolving global financial trends.
