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UAE, Saudi and Bahrain lower interest rates in line with Fed move over virus outbreak

UAE, Saudi and Bahrain lower interest rates in line with Fed move over virus outbreak

Central banks in the GCC matched the Fed’s half-percentage point cut

Policy makers in the Gulf followed the US Federal Reserve’s emergency move on Tuesday, lowering interest rates in response to the coronavirus outbreak.

Central banks in Saudi Arabia, the United Arab Emirates and Bahrain matched the Fed’s half-percentage point cut, hours after chairman Jerome Powell said the fallout from the virus had increased risks to the US economic outlook.

Gulf central banks largely move in lockstep with the US to protect their currencies’ pegs to the dollar.

* The UAE’s central bank said it’s reducing the repo rate and its certificates of deposit rate by 50 basis points.

* The Saudi Arabian Monetary Authority cut the repo rate to 1.75 per cent from 2.25 per cent and the reverse repo rate to 1.25 per cent from 1.75 per cent

* Bahrain’s central bank lowered its key rate to 1.75 per cent from 2.25 per cent

The Fed’s decision came after Powell and finance chiefs from the Group of Seven nations said they would “use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.”

Disruptions to trade, tourism and supply chains are blindsiding the GCC, which already faces the prospect of lower crude prices if the health emergency continues to pummel energy demand.

Commodity exporters are especially exposed to trade with China, where the outbreak has crippled production and consumption, as factories remain below capacity and transport is curtailed.

Business conditions have already taken a turn for the worse. The spillovers resulted in “a sharp loss of momentum since the start of 2020” for Saudi Arabia’s non-oil private sector, according to IHS Markit.

The question now is whether regional governments will also move to enact fiscal stimulus. While a looser stance by central banks will provide some relief, fiscal spending can pack a more powerful punch in the Gulf.

Bank margins in the region will probably react to the 50 basis-point cut before the second half of the year, according to Bloomberg Intelligence analyst Edmond Christou.

“This has a bigger impact in 2020, as 2019 cuts were spread out over time,” he said.

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