US Federal Reserve hike leads GCC to follow, but rate paths diverge again

Most central banks across the Gulf Cooperation Council (GCC) followed the US Federal Reserve in raising interest rates for the fourth time this year to maintain their currencies’ pegs to the US dollar, although Kuwait and Qatar didn’t match the increase in full.

A mismatch between the US, where inflation is running at the hottest pace in four decades, and the economies of the six members of the GCC has created additional room for maneuver for local policy makers who don’t need to act with the same urgency to contain price pressures.

But with most regional currencies tethered to the dollar, central banks still largely track Fed decisions. On Wednesday, Saudi Arabia, Bahrain and the United Arab Emirates moved in lockstep with the US central bank and raised their benchmarks by 75 basis points.

In the UAE, the central bank raised its benchmark base rate for its overnight deposit facility (ODF) by 75 basis point.

Kuwait, which maintains a peg to a basket of currencies, didn’t deliver the full rate hike and increased its discount rate by 25 basis points only, while Qatar increased its lending rate by 50 basis points. In June, the misalignment with the US already allowed Saudi Arabia and Kuwait to lift rates by less than the Fed’s 75 basis-point move.

“Some GCC countries still have flexibility not to fully follow the magnitude of the Fed’s rate hike,” Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC, said before the rate announcements.

“The critical point is that inflation levels in the GCC are significantly below the US levels, especially for the countries that have introduced fuel price caps. Thus, the region does to require the same degree of monetary tightening as in the US.”

Kuwait raised its discount rate by 25 basis points to 2.5 per cent from 2.25 per cent. Qatar raised its deposit and repurchase rates 75 basis points to 3 per cent  and 3.25 per cent respectively, while increasing its lending rate 50 basis points to 3.75 per cent

Bahrain raised its overnight deposit rate 75 basis points to 3 per cent, its four-week deposit rate to 4 per cent, its lending rate to 4.5 per cent and its one-week deposit facility to 3.25 per cent. The UAE raised its overnight deposit facility by 75 basis points. While, Saudi Arabia increased its repo rate 75 basis points to 3 per cent and its reverse repo rate 75 basis points to 2.5 per cent.

In the US, Fed Chair Jerome Powell is moving aggressively to raise rates amid criticism he was slow to respond to rising prices last year.

Watch Chair Powell’s statement from the #FOMC press conference:

Intro clip: https://t.co/K2LiY6hWtM

Full video: https://t.co/J8NUrfGgVi

Press Conference materials: https://t.co/D39XU1uopE pic.twitter.com/X1KxuzdgiK

— Federal Reserve (@federalreserve) July 27, 2022

Consumer inflation across the GCC is set to end the year at 3.1 per cent, according to the International Monetary Fund, much lower than in the US and across the wider Middle East.

With oil prices set to average above $100 a barrel this year, most countries in the region are on track to run large budget surpluses, according to the IMF, giving them more scope to increase spending.