The central banks of the GCC have reduced interest rates following a significant move by the US Federal Reserve, which cut its benchmark rate by 50 basis points on Wednesday.
The Federal Reserve’s decision to lower its rate by half a percentage point now places it within a range of 4.75% to 5%. This marks the first reduction after 11 consecutive rate hikes over the past 16 months, followed by a lengthy period of stability. More cuts are expected, with the Fed indicating that this could be the start of further reductions extending into 2025.
In response, the UAE Central Bank (CBUAE) announced it would lower the base rate for its Overnight Deposit Facility (ODF) by 50 basis points, from 5.40% to 4.90%, effective Thursday, September 19, 2024. The CBUAE will maintain the borrowing rate for short-term liquidity at 50 basis points above the base rate for all standing credit facilities.
Saudi Arabia’s Central Bank also reduced its repo rate by 50 basis points, bringing it down to 5.50%, and cut its reverse repo rate by the same margin, reducing it to 5%.
Qatar followed suit, cutting its key interest rates by 55 basis points. The lending interest rate is now set at 5.70%, the deposit interest rate at 5.20%, and the repo rate at 5.45%, according to an official statement.
The Central Bank of Bahrain (CBB) also announced a 50 basis point reduction in its overnight deposit rate, from 6.00% to 5.50%, effective September 19. The CBB emphasized that the decision aims to maintain monetary and financial stability amid global financial market fluctuations.
Meanwhile, Kuwait’s Central Bank (CBK) made a smaller cut, reducing the discount rate by 25 basis points, lowering it from 4.25% to 4%. CBK Governor Basel Al-Haroon highlighted that Kuwait’s inflation rate has significantly slowed, from 4.71% in April 2022 to 3% in July 2024, justifying the modest reduction.
Federal Reserve’s Strategy and Market Impact
The Federal Open Market Committee (FOMC) reaffirmed its commitment to achieving maximum employment and maintaining inflation at a 2% target in the long run. With growing confidence that inflation is moving sustainably toward this target, the Committee views the risks to employment and inflation as relatively balanced.
The Fed also indicated it would continue reducing its holdings of Treasury securities, agency debt, and mortgage-backed securities as part of its broader economic strategy.
Fed Chairman Jerome Powell, speaking after the announcement, noted that the rate cut reflects the Fed’s belief that an appropriately adjusted policy can sustain labor market strength while gradually lowering inflation to the 2% goal.
The market reacted positively to the news, with US stocks rallying, while the dollar dropped by 0.5% to its lowest level in more than a year. Gold prices surged, hitting a new high of $2,591.19 per ounce.
This coordinated effort between the GCC central banks and the US Federal Reserve underscores the global push to balance economic growth, inflation control, and financial stability amid ongoing uncertainty in the global financial landscape.
