Saudi Arabia, Kuwait and Bahrain raised interest rates within minutes of the U.S. Federal Reserve’s decision to do so on Wednesday as they scrambled to avoid downward pressure on their currencies due to low oil prices.
Early this year, speculators attacked the Saudi riyal and other Gulf currencies as cheap oil pushed the state finances of those countries into deficit. The riyal and most other Gulf Arab currencies are pegged to the U.S. dollar.
Pressure on the currencies has eased in recent months as oil prices have begun to rebound and governments have cut spending to reduce their deficits. But authorities are keen to prevent higher U.S. interest rates from reviving the speculation.
Local bankers expect the central banks of the United Arab Emirates, Oman and possibly Qatar to raise their own rates in coming days.
After the Fed lifted the federal funds target by a quarter of a percentage point, Saudi Arabia raised its reverse repurchase rate – the rate at which commercial banks deposit money with the central bank – by the same margin to 0.75 per cent.
The Saudi central bank cited “developments in the domestic and international financial markets”; it did not elaborate.
But it also decided to keep its repurchase rate, which it uses to lend money to banks, unchanged at 2.00 per cent – a signal that it is trying to prevent low oil prices from hurting liquidity at banks and pushing up money market rates steeply, which could slow the Saudi economy.
Kuwait’s central bank raised its discount rate, used to determine maximum interest rates on dinar borrowing at local banks, by a quarter of a percentage point to 2.50 percent. The bank said it aimed to “ensure the continued competitiveness and attractiveness of the national currency”.
Bahrain raised a range of policy rates by a quarter of a percentage point. In the past, the UAE has hiked rates within a day of a U.S. increase, and Oman’s central bank began raising its overnight repo rate in small increments earlier this year.
In contrast to other Gulf central banks, Qatar decided not to hike rates after the last U.S. interest rate increase in December 2015, and it may make the same decision again.
However, analysts believe that, because of its currency peg to the dollar, Qatar will not be able to resist pressure indefinitely to tighten monetary policy, especially since the Fed signalled a faster pace of increases in 2017.