The central banks of most Gulf countries have announced interest rate hikes, following the US Federal Reserve. Saudi Arabia, Qatar, the United Arab Emirates, Kuwait and Bahrain have already applied this increase, and Oman is expected to follow in the coming days.
Gulf monarchies react to Fed action which on Wednesday raised interest rates by 75 basis points, the largest increase since 1994, bringing the rate to between 1.5 and 1.75%. With this measure, the agency intends to combat soaring inflation, which threatens post-COVID economic recovery worldwide.
Most of these countries, which together form the Gulf Cooperation Council (GCC), have their currencies pegged to the dollar, with the exception of Kuwait and Oman, which are pegged to a basket of currencies that also includes the US currency. These monarchies are also heavily dependent on the production of oil and natural gas, the sales of which are made mainly in dollars.
The Saudi central bank increased the repo and reverse repo rate by 50 basis points, from 1.75 to 2.25%. This rate is levied on repo transactions in which a financial institution sells an asset to an investor by undertaking to buy it back on a given date and at a given price. This increase is the smallest among the major Gulf economies, given the good inflation figures Riyadh is posting, 2.2% in May, compared to 2.3% in April.
The Kingdom’s central bank announced that this decision was taken in order to continue achieve its monetary policy and financial stability objectives, highlighting the unfavorable global and local context.
The Central Bank of Kuwait has raised its bank rate by 25 basis points to bring it to 2.25%. This rate is the cost of capital used to determine the present value of a future payment. In addition, the Kuwaiti bank announced a whole series of measures to weather the global economic storm.
Stock markets in the red
On Thursday, most of the region’s financial markets reacted negatively to the rise in interest rates and a slight drop in the price of crude oil, which nevertheless remains at very high levels.
The ADX General, Abu Dhabi’s main stock market index, fell 0.8% to 9,505 points, while Dubai’s DFM General fell 1.7% to 3,280 points. In Saudi Arabia, the Tadawul All Share, the country’s flagship index, fell 1.3% to end the day at 11,824 points, while the Qatari QE General fell 0.5% to 12,562 points.
Meanwhile, the indices of Bahrain, Kuwait and Oman, the GCC’s three smallest economies, closed the day. up 0.1, 0.3 and 0.2%respectively.
The sharp rise in crude oil and natural gas prices, initiated with the post-COVID economic recovery and greatly aggravated by the war in Ukraine, ensures solid incomes for these countries, after the low prices of these basic products during the economic crisis of 2020 hit them hard.
Central banks in several of the world’s major economies are also raising these rates. The Bank of England recently announced an interest rate hike of 25 basis points, while the Swiss National Bank, whose rates are in negative territory, did the same by 50 basis points. The European Central Bank is also expected to raise rates in July.
Coordinator for the Americas: José Antonio Sierra.