The cut in benchmark lending rates by the UAE and Saudi Arabia's central banks with an aim to ease liquidity in the system may take a while to show its real impact though it reflects the strong dedication of the central banks' to support growth, said analysts.
The current liquidity squeeze, feel the analysts, would require varied measures to normalise. A relative ease in inflationary pressure could have led to the decision of rate cut, they said.
The decision, said researchers, is a strong signal of the dedication to support growth and more such measures may follow.
Standard Chartered Bank said the rate cut follows the release of data that signals a drop in inflationary pressures in both the countries.
"Consequently both Central Banks felt that they had the necessary margin to ease interest rates," it said.
"Both central banks have been trying to ease liquidity conditions with mixed results. With regards to inter bank market rates, Saibor has fallen significantly and is currently at 1.38 per cent – a 300bp decline in less than three months.
Eibor has been treading down only marginally, despite numerous attempts by the UAE Central Bank to thaw credit conditions, and stood at 3.93 per cent on Monday against 4.78 per cent in October," said the Standard Chartered comment, authored by Senior Economist Philippe Dauba-Pantanacce and Senior Softs Analyst Abah Ofon. The real impact of the move, however, may take a while to show, they added.
Wadah Al Taha, Senior Financial Analyst, said: "The main objective of any rate cuts is to motivate borrowing, motivate lending and to pump more liquidity. But unfortunately we have already lack of liquidity in the market. We should not expect an immediate impact of this rate cut on the market. Firstly, there is already a gap of liquidity which has not filled. The amount of funds that migrated from UAE to outside has not been replaced. That kind of amount has not been pumped."
The high loan to deposit ratio is a major sphere that banks require effective handling, said analysts.
Al Taha said: "I think already the banks have problems in terms of the main benchmark of loan to deposit ratio which is among the highest in UAE in all the Gulf countries, 105 per cent. It's extremely high and also risky. In the last few months, financing has almost dried out and it has had an impact on the banks' interest income. The situation would not improve much unless more liquidity is pumped and unless there are acceptable borrowing rates from Central Bank to the banks."
The bank said a further monetary easing could materialise in Kuwait and Bahrain in the short term.
"SAMA argued that its decision was taken to re-align policy rates to current market conditions and to help ensure that credit is available for genuine corporate demand. The move, which was surprising in its timing, was followed shortly by the UAE, the ING team said. "Saudi's decision has to be read as a particularly aggressive signal of the authorities dedication to supporting growth. "
According to ING, in case of UAE, "it is impossible, due to poor updated statistical data on credit, to determine whether the policy rate adjustment is a reaction to credit growth slumping, it does make sense as a protracted action to ensure smoother interbank condition."
ING said inter bank rates in UAE have remained unduly high and a further monetary easing could materialise in both Saudi Arabia and the UAE.
Kuwait is expected to cut interest rates after Saudi Arabia and the UAE slashed key rates on Monday.
The rate cut could be between 0.25 and 0.50 per cent, Kuwaiti daily Al Watan said. (Reuters)