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Central Bank Cuts Key Interest Rate to 1.5pc

The cut — the first since the Central Bank began extending these credit lines last September — would take effect from Tuesday, September 1, the Central Bank said on Monday. The measure is intended to help reduce the cost of financial activities in the UAE, particularly investment spending, and thereby contribute to sustained growth and support for the national economy.

“The Central Bank move is aimed at providing more liquidity to the market. The utilization of the liquidity support facilities by banks went up in February and March but declined later, reflecting the fact that liquidity has been restored,” said Dr Nasser Saidi, Chief Economist of the Dubai government’s Dubai International Financial Centre.

UAE banks can borrow under the Dh120 billion in total credit lines by depositing securities with the Central Bank.

“The liquidity support facilities to banks is the mechanism whereby liquidity is injected into the banking system through discounting first-class securities held by banks,” Khalil Mohamed Sharif Foulathi, Chairman of the Board of Directors of the Central Bank, said in the statement.

Mohamed Al Tamimi, Assistant Executive Director of the Central Bank’s Treasury Department, told the Reuters news agency that UAE banks were liquid and currently hold around Dh60 billion in certificates of deposit with the Central Bank.

Dr Saidi agreed that liquidity was sufficient but said that the cost of funds remains a concern.

“The new measure by the Central Bank will encourage banks to use liquidity to lend at reduced rates,” he said. ”A reduction in the cost of borrowing will help corporates and stimulate increased spending.”

However, Monica Malik, a regional economist at investment bank EFG-Hermes, said the rate cut would have only a limited impact in spurring economic growth. She declined to elaborate.

Some bankers said the rate cut was part of the Central Bank’s effort to trim the Emirates interbank offered rate, or EIBOR.

“Nobody is using this (support) facility right now, and I’m not sure they will, even at these levels,” said Mohammed Al Hashemi, associate director of asset and liability management and money markets at Emirates Bank, according to Reuters.

Monday’s rate cut is the latest in a string of measures that the Central Bank has taken since the middle of last year, when the UAE economy began to falter amid the global downturn, to encourage more bank lending to stimulate the economy.

The Central Bank announced a plan last month to establish an official interbank offered rate for the dirham to better reflect market conditions and encourage lending. The regulatory authority said it would use lending rates from 11 banks to compute a new EIBOR.

Also in August, the Central Bank extended the period over which it lends money to commercial banks at a fixed rate.

· issacjohn@khaleejtimes.com