UAE interbank rates hit multi-year lows

Interbank lending rates in the UAE fell to multi-year lows yesterday as the dollar-pegged country brings the cost at which banks lend to each other into line with its Gulf neighbours and the United States.

Since August, the UAE Central Bank has undertaken a raft of measures to lower the rates it long said were too high.

The central bank took control of the fixing process earlier this month when participating banks began submitting their daily rates to the central bank.

Since then, rates have steadily declined.

The one-month Emirates Interbank Offered Rate declined to 1.5075 per cent yesterday, its lowest level since July 2004, while the three-month rate fell to 1.95625 per cent, its lowest level since June last year.

Typically what happens is that the pegging country adjusts its interest rates along with the anchor country and since US rates are at decades-lows that's why we are seeing these lows here, according to Giyas Gokkent, Head of Research at National Bank of Abu Dhabi.

The US benchmark federal funds rate stands at between 0-0.25 per cent. The UAE benchmark repo rate stands at 1 per cent.

In its effort to bring down the cost of interbank lending, the UAE central bank also rejigged the panel of providers for the Emirates Interbank Offered Rate (Eibor) and altered the formula used to calculate it.

"But if you compare UAE rates with those of Saudi Arabia they are still high. There is still substantial room for them to fall," Gokkent said.

Yesterday, the three-month Saudi interbank offered rate stood at 0.745 per cent, while the one-month rate was fixed at 0.3 per cent and the one-year rate was 1.3225 per cent.

The interbank cost of borrowing US dollars, euro and sterling has been steadily falling for a year as central banks pumped liquidity into the market and record low rates have been registered at the daily fixings in London.

London interbank offered rate (Libor) for three-month dollars stood at 0.28188 per cent on Friday, while the one-month rate was 0.24375 per cent.

Tighter liquidity conditions had caused UAE interbank rates to fall at a slower rate than its neighbours from peaks reached in the midst of the global credit crunch, said Gokkent.

"Some foreign money went out and then there was a drying up of external credit because international banks had their problems and banks here had used foreign borrowing to fund their growth."

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