A synchronized move has been observed in Gulf central banks with respect to the US Federal Reserve’s latest monetary decision. This is the second move within a year, reflecting a dedicated strategy to promote economic development in a world full of uncertainties. This move is a result of a long-term economic relationship between the Gulf countries’ economies and the US Federal Reserve.
Fed leads Gulf states in synchronized monetary policies
A conclusive move by the US Federal Reserve on Wednesday had a ripple effect on Gulf financial markets. This important move steps in as a trigger that has elicited rapid reactions from central banks in the Middle Eastern region, thus signifying interdependence in the Middle Eastern monetary structure. Fed Chairman Jerome Powell had been under mounting demands from US President Trump on accommodative monetary policies during this important process.
A large number of Gulf central banks reacted to the Fed’s announcement only a few hours later, indicating a commitment to making sure that monetary policy is in sync. This is in respect of the swift response of the UAE Central Bank to change the policy stance, as well as simultaneous changes in Saudi Arabia’s various rate instruments. It is important to recognize that regional cooperation is gaining prominence in the wake of ongoing economic uncertainties across the globe.
Full rate changes affect various Gulf economies
Five of the Gulf Cooperation Council currencies use fixed pegs to the US dollar, including the Saudi Riyal, the UAE Dirham, the Qatar Riyal, the Bahrain Dinar, and the Omani Rial. This monetary system makes a synchronized set of interest rates mandatory in order to ensure that stability is attained in the exchange rates. This is according to the Central Bank of Oman, which stated that fixed exchange rates ensure stability in national currencies.
What makes this synchronized move interesting is that the discriminating piece of information is with respect to the extent to which the easing is initiated, in that central banks cut their policy rates by 25 basis points. The Fed, on the other hand, reduced its benchmark rate by 25 basis points to a range of 3.75-4 percent, the second time this year since the initial easing in September.
Main rate changes in the region:
- UAE: Overnight deposit facility rate lowered to 3.90 percent
- Saudi Arabia: Repo rate reduced to 4.5 percent, reverse repo rate is set at 4 percent
- Qatar: Repo rate, lending rate, and deposit rate fell to 4.35%, 4.6%, and
- Bahrain: Overnight deposit rate reduced to 4.5 percent
- Oman: Repo rate cut to 4.5%
Kuwait Destroys ranks with a non-independent monetary policy
Kuwait’s central bank kept current interest rates in place, saying that the overall monetary policy is in line with the Kuwaiti economy. A Kuwaiti dinar is pegged to a basket of currencies, dominated by the US dollar but not comprised of dollars alone. This gives a greater degree of freedom than Gulf countries that price in dollars directly.
Expected synchronized cuts will fuel economic activities in the region as a result of reduced borrowing costs. Analysts foresee that lowering interest rates will encourage spending, as well as investment and property sector activities in Gulf countries. It is, however, unclear what the pace of further easing will be due to Powell’s sentiments about cuts in the future.
“A further reduction in the policy rate at the meeting in December is not a foregone conclusion – far from it,” according to Powell.
This alignment of monetary policies supports the integration of the Gulf region with international financial markets, as well as underscoring the need to consider US economic factors in decision-making in this region. This joint approach helps in maintaining stability in exchange rates as well as avoiding outflow of capital that could adversely affect financial systems in this region in cases of differences in monetary policies in large economies.