The UAE Central Bank may find itself forced to make another cut in rates following an anticipated cut by US Federal Reserve in tomorrow’s meeting. Global markets have already factored in another drop in the federal benchmark rate from 3.50 to three per cent.
According to banking sources, the Central Bank, of late, has not been encouraging short-term bids in its daily auctions for certificates of deposits, or CDs, a system that it introduced in November. Bids at conventionally low rates have not been accepted, sources said.
“I’ve bid at 2.7 per cent for one-year CDs, two per cent for one week and 2.15 per cent for one month. None was accepted by the Central Bank [yesterday],” a foreign bank’s treasury head said.
He said the Central Bank seems to be preparing itself for the Federal Open Market Committee (FOMC) meeting this week when a 50 basis point cut is almost certain. “The range of rates between two and 2.7 per cent is considered to be very low and if the Central Bank doesn’t accept these bids it means the market has discounted another cut by the Fed when it meets tomorrow,” another banker said.
Arif Lakhani, Chief Executive of Habib Bank Zurich, said the Central Bank is “doing its level best” to establish a dirham rate curve, which will be of great help to banks as well as corporate borrowers. “The country’s financial system is maturing and it is time we had our own monetary tools. The dirham curve is one of the most vital such tools in benchmarking interest rates,” he said.
Last week, following the unexpected rate cut of 75 basis points by the Fed, the UAE Central Bank effected a similar cut in its repo rate.
According to currency experts, this has helped deter market bets on the revaluation of the dirham.
On November 28, the Central Bank said it will henceforth use the auction format to issue dirham- dollar- and euro-denominated CDs to banks operating in the UAE. The certificates will be for maturities ranging from one week to five years. It was also the first time the euro was introduced into the UAE’s formal banking system.
According to the Central Bank, this will develop and add depth to the financial market and create a real yield curve for the dirham, which would serve as a benchmark in financial markets. Banks would be able to consolidate their liquidity positions by conducting repo agreements with the Central Bank and with each other. The auction system is to determine interbank lending rates.
The Central Bank holds daily auctions for one-week to 12-month CDs and monthly auctions for CDs of two, three, four and five-year terms. Strong demand for dirham deposits will cut the yield on certificates, making bets on dirham appreciation less attractive.
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