The UAE and Saudi central banks yesterday cut their benchmark lending rates by 50 basis points in a move designed to increase liquidity in the long term as economic growth forecasts narrowed.
The Saudi Arabian Monetary Agency reduced its key repurchase rate to 2.00 per cent and its reverse repurchase rate to 0.75 per cent from 1.50 per cent.
The UAE Central Bank cut its repo rate to 1.00 per cent.
The cut will be effective only in the long term and there will be no immediate impact on interest rates.
UAE Central Bank Governor Sultan bin Nasser Al Suwaidi said the rate cut – set against the slowdown in the world economy and the decline in inflationary pressure in the country – would support domestic economic activity and boost confidence in businesses.
A Central Bank spokesman said interbank rates in the UAE are showing a downward trend due to the flexible dirham swap facility.
"The 50-point cut should further reduce the cost of the liquidity-supporting facilities implemented by the Central Bank to help banks," added the spokesman. "Also, the lower cost of funds will ultimately reduce customer loan interest rates and further enhance sustained development prospects."
A banker, who wished to remain anonymous, said: "The interest rate cut is a positive move by the Central Bank as it will give positive indicators for investors.
"The reduction aims to transfer deposits from banks into the economic system – it is intended to transfer liquidity from banks into individuals' hands.
"However, this process will take some time to be effective. The UAE has negative interest rates because of the high inflation rates. Also, investors are waiting for the annual results of banks and other companies listed on the stock markets before making any investment decisions. So the interest rate cut will take several months to affect the markets."
The banker said the impact on interbank rates would be marginal.
Ziad Dabbas, a financial consultant at the National Bank of Abu Dhabi, welcomed the cut as a positive indicator of increasing liquidity in the banking system.
"The difference between the interest rates for the dirham and the dollar encouraged some investors to increase their deposits in dirhams to benefit from this difference," he said.
"This helped increasing liquidity in the local banking system but also harmed the economy, and accordingly the Central Bank is trying to halt this process."
Dabbas ruled out any immediate impact on investors, who he said would remain reluctant to withdraw their deposits and inject liquidity.
Humam Al Shamaa, a financial consultant at Al Fajr Securities, said he expected that the repo rate cut would help reduce interbank rates as banks would be able to repurchase their certificates of deposit at lower rate
Meanwhile Bahrain left its key interest rate unchanged.
"Bahrain will cut interest rates only when the local market justifies a reduction and we haven't taken any action yet," said an official.