U.A.E., Qatar, Bahrain and Saudi Arabia Cut Rates

The United Arab Emirates decided to cut their bank repository rate by 0.25% to 5.25%; Saudi Arabia decreased its benchmark rate for deposits also by 0.25% to 4.0%; Qatar and Bahrain reduced their deposit rates by the same amount – 0.25% to 4.0%. Kuwait refrained from changing the country’s interest rate, because they’ve already removed their currency’s peg to dollar back in May 2007.

This rate change followed the cut by U.S. Federal Reserve decision to lower the rate from 4.50% to 4.25% yesterday on December 11. Gulf countries, such as Saudi Arabia and U.A.E., started to peg their national currencies to dollar decades ago, and they have to maintain the similar interest rates to keep this peg up.

Lowering the interest rates goes against the general monetary policy of the Gulf countries in the way that it stimulates inflation, which is already very high due to the devalued dollar. Fighting inflation is an important task stated by the government of U.A.E. and this rate cut can only boost up the prices growth.

Although this step contradicts anti-inflation policy, it is almost doubtless that such a small rate change won’t hurt a lot. The possibly better side effect of this change would be another reason for consideration of the dollar peg abandonment by these oil countries.