Fed’s Dash to Zero Lets Gulf Top Off Stimulus With Rate Cuts
Fed’s Dash to Zero Lets Gulf Add Rate Cuts to Fiscal Stimulus
(Bloomberg) --
Central banks across the Gulf cut interest rates to bolster already unveiled stimulus after the U.S. Federal Reserve lowered its benchmark to near zero to counter the economic fallout of the coronavirus.
As the spreading outbreak paralyzes commerce and tourism, local economies are also having to contend with the crash in oil prices and the threat it presents to budgets and investment. With Gulf currencies tethered to the dollar, central banks generally track Fed rate decisions.
Only Kuwait, which maintains a peg to a basket of currencies, matched the Fed’s unexpected cut of a full percentage point, while its neighbors opted for smaller reductions.
The caution may reflect worry around the Gulf about capital flight, or could be an attempt to leave some room to lower rates in case the Fed cuts below zero, according to Ziad Daoud of Bloomberg Economics.
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“Interest-rate cuts, as well as liquidity injections by the central banks in Saudi Arabia and the U.A.E., are helpful -- they assist viable businesses that might be struggling now with lockdowns and social distancing. But monetary easing is limited by the currency peg and the fact that rates are unlikely to fall further. Fiscal policy should do most of the heavy lifting, but it’s now constrained by the sharp drop in oil prices.” --Ziad Daoud |
- The central bank of the United Arab Emirates cut the rate on one-week certificates of deposit by 75 basis points.
- The Saudi Arabian Monetary Authority also lowered its repo rate by 75 basis points to 1%, and its reverse repo rate by the same amount to 0.5%.
- Kuwait reduced its discount rate by 100 basis points to an all-time low of 1.5%.
- Qatar’s central bank decreased its deposit and repurchase rates by half a percentage point and lowered the lending rate by 100 basis points.
- Bahrain cut its policy rate by 75 basis points. The central bank of Oman, one of the Gulf’s weakest economies, has yet to make an announcement.
“The peg has served us very well,” Mubarak Rashed Al Mansoori, governor of the U.A.E. central bank, told Bloomberg TV. “It has been productive for the U.A.E. economy with a lowering of rates at this time, especially also with the low oil price.”
Going Negative?
But with the U.S. likely out of space for further rate cuts, the burden of cushioning economies in the Gulf will fall on budgets stretched by the biggest oil-price collapse in a generation. Fed officials dislike the idea of negative rates and Fed Chair Jerome Powell again dismissed it at his press conference on Sunday.
Still, the U.S. central bank’s second emergency move in less than a month is a relief for the Gulf. Following the oil rout in 2014, the Fed raised rates nine times, leaving central banks in the region unable to reduce borrowing costs to help weather the effect of lower crude prices on their economies.
Regional policy makers have already pledged billions of dollars to limit the economic damage from the virus. But with crude still in freefall, additional spending could prove to be a challenge.
“We have tried to do as much as we can to make it possible for banks to achieve our objective,” Al Mansoori said. “Eventually, the banks are in the driving seat, they make the decision, but we are making it possible for them to get zero-interest loans and also we are reducing some of the fees.”
Key highlights of stimulus in the Gulf:
- Saudi Arabia’s central bank pledged a 50-billion riyal ($13.3 billion) package to support private businesses, while the U.A.E.’s announced a 100-billion dirham ($27.2 billion) program to assist its lenders.
- Qatar was the latest to unveil a stimulus program of 75-billion riyals ($20.5 billion).
- Bahrain’s cabinet will authorize the finance minister to use up to 5% of this year’s government spending on emergency expenses to limit the impact of the coronavirus, Bahrain News Agency reported Monday.
- Abu Dhabi Crown Prince Mohammed Bin Zayed said that all approved capital expenditure and development projects in the emirate will continue to take place. He also said a new committee will be formed to review lending options to support local companies.
- Further measures could be introduced if required, according to Al Mansoori.
--With assistance from Desley Humphrey and Yousef Gamal El-Din.
To contact the reporter on this story: Abeer Abu Omar in Dubai at aabuomar@bloomberg.net
To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky
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