Kuwait's central bank cut its one-week and one-month repurchase rates by a quarter percentage point, a day after reducing its benchmark interest rate.
The one-week rate was lowered to 1.5 per cent and the one- month to two per cent, according to data posted on the central bank web site yesterday. The overnight repo rate remained unchanged. The one-week and one-month rates were last cut in July 2009.
The central bank yesterday reduced its discount rate by half a percentage point to 2.5 per cent. That cut, the sixth since October 2008, aimed "to provide an atmosphere conducive to the growth of non-oil sectors in the local economy by reducing the cost of lending," Central Bank Governor Sheikh Salem Abdul Aziz Al Sabah said, according to the state-run Kuna news agency. The last reduction in that rate was on May 13.
Kuwait's economy is estimated to have contracted 1.5 per cent last year, compared with a 6.3 per cent expansion in 2008, according to the International Monetary Fund. Oil prices peaked at more than $147 (Dh540) a barrel in July 2008 and fell to a low of about $34 a barrel in December of the same year. Oil now trades at about $72 a barrel.
Kuwait's interest rate cut may signal a more aggressive monetary policy approach in 2010 by attempting to kick-start credit growth after the government approved a $100 billion spending plan.
"What's encouraging is that the rate cut comes so quickly after parliament finally approved the additional spending plans," said Simon Williams, chief economist at HSBC Middle East. "It's early days, but it does look like we're starting to see a more assertive policy action to counter what has been a severe slowdown in the domestic economy."
EFG-Hermes, in a research note, said the rate cut is aimed at boosting non-oil sector growth by improving credit flows. Credit growth decelerated to 6.1 per cent in 2009, it said.
EFG also said there is more room for Kuwait's central bank "to reduce its lending rate by another 50 basis points in 2010, although our core scenario is for rates to remain on hold".
The research house does not expect other Gulf countries to immediately follow suit and lower interest rates, but rather keep their powder dry in the event that credit growth, or the economic recovery, disappoints in 2010.
Last week, Kuwait's parliament approved a four-year $107.1bn government spending plan.
EFG, like HSBC, sees the rate reduction as complementary to parliament's investment package.
"But policy execution rather than policy formulation will be the challenge," HSBC's Williams said.
"What the market will want to see is agreement on specific projects in Kuwait and disbursements starting to flow."
In Kuwait, policy formulation and implementation are not always intertwined.
In another report, ratings agency Moody's Investors Service said Kuwaiti Government's 2010-2014 development plan, which envisages more than KD30 billion (Dh382bn) in spending, could help boost the Kuwaiti banks' asset quality and ailing local construction firms.
Keep up with the latest business news from the region with the Emirates Business 24|7 daily newsletter. To subscribe to the newsletter, please click here.