Saudi, UAE central banks raise key rates after Fed hike

Saudi Arabia’s central bank raised interest rates on Wednesday, following a quarter point hike of a key rate by the US Federal Reserve.

The Saudi Arabian Monetary Authority decided to raise the reverse repo rate, the rate at which commercial banks deposit money with the central bank, by 25 basis points to 1.25 percent. The Kingdom’s central bank, however, kept the repo rate unchanged at 200 basis points.

SAMA said the measure will take place with immediate effect, SPA reported.

Most GCC members have their currencies pegged to the US dollar and are constrained to tailor their monetary policies accordingly. Kuwait pegs the dinar to a basket of currencies, in which the dollar dominates.  

“As most of the GCC currencies are pegged to the USD, the benchmark rates have to rise in line with the Fed Funds rate,” Khatija Haque, head of Mena research at Emirates NBD, told Argaam.

This is the second time in three months that the US Federal Reserve has raised its key rate. An official statement cited the continued strength in the labor market and the moderate rise in economic activity this year.

The Fed statement also noted that inflation in the next 12 months "is expected to remain somewhat below 2 percent in the near term" but to stabilize.

The United Arab Emirates and Bahrain also mirrored the hikes, raising their key rates by 25 basis points.

The repo rate applicable to borrowing short-term liquidity from UAE Central Bank against certificates of deposits has also been increased by 25 basis points to 1.50 percent, the Emirati central bank said in a statement.

According to Reuters, the interest rate on Bahrain's one-week deposit facility was increased to 1.50 percent from 1.25 percent. Overnight deposit rate was raised to 1.25 percent from 1.00 percent, the one-month deposit rate to 2.15 percent from 1.75 percent, and the lending rate to 3.25 percent from 3.00 percent.

Kuwait, however, decided to maintain the discount rate at its current 2.75 percent.

Write to Brinda Darasha at brinda.d@argaamplus.com