Saudi, Kuwait, Bahrain raise interest rates after historic Fed hike

Saudi Arabia's central bank raised its benchmark reverse repurchase rate on Wednesday by 25 basis points to 50 basis points, matching the U.S. Federal Reserve's benchmark rate hike.

The Saudi Arabian Monetary Agency (SAMA) left the repo rate unchanged.

This decision was made in line with domestic and international financial market conditions, SPA said citing SAMA.

The central banks of Kuwait and Bahrain also announced hikes of a quarter of a percentage point in key rates.

Central Bank of Kuwait Governor Dr. Mohammad Al-Hashel said the decision stemmed from CBL’s commitment to ensure the national currency remains competitive.

Five of the six Gulf oil exporting states peg their currencies to the U.S. dollar, while Kuwait ties its dinar to a basket of currencies dominated by the dollar.  

Other Gulf Cooperation Countries (GCC) states—United Arab Emirates, Oman, and Qatar— are also expected to raise rates.

The plunge of oil prices since last year has started to put pressure on those pegs by slashing governments’ oil revenues and pushing the current account balances of some countries into deficit. Now the rise of U.S. interest rates threatens to increase the pressure by sucking funds out of the Gulf.

Earlier, as was widely anticipated, the U.S. central bank lifted the range of its benchmark interest rate by a quarter of a percentage point to 0.25-0.50 percent –its first rate hike since 2006.

The Federal Reserve cited “considerable improvement” in the labor market and expectations of a rise in inflation to its two percent objective.

The Fed, however, stopped short of forecast on future increases, choosing to “assess realized and expected economic conditions.”

Tim Fox , head of research and chief economist at Emirates NBD, told Argaam the rate rise is a positive factor for most markets as it underpins the recovery of U.S. economy.

Shoaib Abedi, director of ICM Capital, said the Fed will now assess global oil prices before deciding on future course.

“I think the Fed will watch the game develop over the next few months, before we can see another step towards raising interest rates,” he added.

Fox, however, believes more increments are in the offing.

“The markets are expecting only one or two more rate hikes in 2016, but our suspicion is that it could be a little more than this,” he said.

He does not expect weak oil prices to stop the Fed from increasing the interest rate again.

Abedi, however, said a rate hike will result in a stronger U.S. dollar and a subsequent drop in prices of commodities that are priced in dollars, including oil.

“The current prices in the commodity markets are already at their lowest levels in years and more rate hikes will affect the energy market and may threaten a collapse of this market and different regions of the world,” he said.

Neither of them, however, saw the possibility of riyal de-peg now.

“We are not expecting a de-peg of the Saudi riyal from the dollar as the potential costs of such a move would outweigh the benefits to regional budgets and to competiveness,” Fox said.

According to Abedi ending the peg would add currency risks to the already existing oil price risks.

“And this is the wrong time to have such a risk added in the region,” he said. 

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

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com