US Fed rate cut triggers GCC ripple effect – here’s what it means

Federal Reserve Chair Jerome Powell. (Image: Getty)

Most central banks of the Gulf Cooperation Council (GCC) cut key interest rates on Thursday, following the Federal Reserve’s decision to reduce US rates by a quarter of a percentage point.

The Fed cut interest rates by 25 basis points as policymakers took note of a job market that has “generally eased” while inflation continues to move towards its 2 per cent target.

The Gulf’s oil and gas exporters generally follow the Fed’s lead on rate moves as most regional currencies are pegged to the US dollar; only the Kuwaiti dinar is pegged to a basket of currencies, which includes the dollar.

“Lower rates in the GCC could fuel growth in sectors sensitive to credit conditions, such as real estate and domestic spending, enhancing resilience in the broader economy,” Vijay Valecha, chief investment officer at Century Financial, said.

Saudi Arabia, the region’s biggest economy, cut its repurchase agreement (Repo) rate and reverse repo rate by 25 bps each to 5.25 per cent and 4.75 per cent respectively, and the United Arab Emirates also reduced its base rate on the overnight deposit facility by a quarter of a percentage point to 4.65 per cent.

Most regional economies have been largely shielded from stubbornly high inflation elsewhere, and have implemented ambitious plans to diversify revenue sources and boost non-oil growth.

In Qatar, the central bank opted to cut its three main interest rates by a slightly deeper 30 bps, while Bahrain’s central bank stuck with a 25 bps reduction in its overnight deposit rate.

Growth among the GCC’s biggest economies is expected to accelerate next year amid higher oil output, according to a recent Reuters poll, while inflation is projected to remain subdued this year and next, with median forecasts ranging from 0.8 per cent to 3.0 per cent.