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Kuwait Cuts Rates as Gulf Seeks to Defrost Credit

The Kuwait central bank slashed its key policy rate by 50 basis points to 3.75 per cent, following a similar cut in Saudi Arabia on Tuesday that took the kingdom’s policy lending rate to 2.5 per cent. The Kuwait rate cut “will lead to a fall in the ... interest on lending operations in Kuwaiti dinars for local banking and financial units,” Central Bank Governor Shaikh Salem Abdul Aziz Al Sabah said in remarks carried by state news agency KUNA.

The governor’s comments mirror those of Saudi Arabia’s central bank on Monday, when it said rate cuts were aimed at ensuring adequate liquidity to meet domestic credit demands.

Global financial turmoil has put the brakes on a regional oil-fuelled economic boom, and has discouraged private investors from taking loans to take part in public-private expansion projects because of the high cost of funding. An oil price slump of about $100 a barrel since July, a downturn in global energy demand and a slowdown in consumer demand at home mean Gulf economies are poised for a major slowdown next year, economists say.

“Credit is one of the challenges of the financial sector right now,” said Faisal Hasan, senior financial analyst at Kuwait’s Global Investment House.

“The central bank wants to infuse liquidity into the system, it is taking cues from the international markets.”

Kuwait is the only Gulf Arab country that does not peg its currency to the US dollar, instead tracking it against a basket of currencies comprising mainly US currencies. But like its neighbours in the world’s biggest oil-exporting region, Kuwait tends to at least partially shadow Fed policy moves to maintain the relative value of its currency.

The central bank also reduced its one-month repurchase rate to 2.5 per cent from 3 per cent on Wednesday, a day after the Fed chopped interest rates to between zero and 0.25 per cent.

The UAE kept its overnight repurchase rate at 1.5 per cent on Wednesday. Its central bank governor said on Tuesday the Gulf state would not match any Fed cut after it refrained from matching the last Fed cut in late October.

Market Rates React

Qatar’s central bank — which has kept interest rates steady as central banks across the world lowered rates since October — had made no rate decision on Wednesday, according to officials at the central bank and Qatari bank treasury departments.

Bahrain’s central bank was closed on Wednesday for a national holiday. Oman’s central bank — which sets interest rates on a weekly basis — cut its repurchase rate by 89 basis points to 1.53 per cent, effective Wednesday.

Kuwait has slashed its benchmark rate by 200 basis points since the credit crisis intensified in October and revamped monetary policy tools last month by introducing new repurchase agreements to give banks more access to short-term funding.

The moves have helped bring down Kuwaiti market rates. The three-month Kuwait Interbank Offered Rate has fallen more than 170 basis points since the beginning of October. It was 3 per cent on Wednesday, down from 3.1875 per cent on Tuesday.