Kuwait and the United Arab Emirates dropped interest rates on Thursday, mirroring a US cut, in a move likely to fuel near record inflation and add pressure on Gulf Arab governments to revalue their currencies.
Kuwait, the only Gulf oil producer not pegged to the dollar, lowered its repurchase rate by 50 basis points to 3.5 per cent, bringing total cuts since the United States started dropping its rates in September to 2 percentage points.
Repo is the rate at which the central bank lends to commercial banks that then guides the rate at which the banks lend on. There 100 basis points in a percentage point.
The UAE, the second-largest Arab economy, also lowered its repo rate by 50 basis points to 3 per cent, matching a similar cut in the United States on Wednesday.
"This is just adding to the stimulus," said Monica Malik, Middle East economist at Egyptian investment bank EFG-Hermes. "It will get to a point that interest rates get so low they could push the Gulf to currency reform."
Gulf oil producers have been reaping a windfall from oil prices that rose to a record above $100 per barrel earlier this month, and that have more than quadrupled during the last six years, fuelling economic growth and inflation.
Qatar, the world's largest exporter of liquefied natural gas, has the highest inflation in the region of 14 per cent, which may rise again this year to 14.5 per cent, according to economists polled by Reuters.
Most Gulf states have negative interest rates, making it cheaper for people to borrow than to keep money in a bank, Malik said.
Kuwait kept is benchmark discount rate unchanged at 5.75 per cent. The UAE, which has not changed the value of its dirham against the dollar since 1997, introduced the repo rate as a benchmark in November. (Reuters)
Rate cut to fuel inflation