In response to the US Federal Reserve raising interest rates, most central banks in the Gulf followed suit Wednesday.
The Fed raised its interest rates by 0.5% — the largest hike in more than 20 years — to 0.75%. The move was a response to rising inflation in the United States. Here’s how Gulf monetary institutions responded, and what it means.
The Saudi Central Bank raised its repo rate by 0.5% to 1.75% and its reverse repo rate by 0.5% to 1.25%.
The repo rate refers to the interest rate on central bank purchases of securities such as bonds from commercial banks. The reverse repo rate is the rate at which the central bank borrows from commercial banks.
The Qatar Central Bank raised its deposit rate by 0.5% to 1.5%, its lending rate by 0.25% to 2.75% and its repo rate by 0.5% to 1.75%.
The deposit rate is the interest rate banks pay on the cash deposits of account holders. The lending rate is simply the rate a bank charges for loaning money.
United Arab Emirates
The Central Bank of the UAE raised its overnight deposit rate by 0.5%, making the rate 2.25%. The overnight deposit rate refers to the rate at which banks loan to other banks after normal business hours.
The Central Bank of Bahrain raised its interest rate 0.5% to 1.75%. It also raised its overnight deposit rate to 0.5% to 1.5%, the four-week deposit rate 0.75% to 2.5% and the lending rate 0.5% to 3%.
The Central Bank of Kuwait raised its discount rate 0.25% to 2%. The discount rate refers to the interest rate charged to commercial banks for loans from the central bank.
Why it matters: Central banks around the world tend to raise their rates in response to the Federal Reserve’s actions. Some Gulf banks raised their rates in March, the last time the Fed hiked rates.
Saudi Arabia, the UAE, Qatar and Bahrain all raised rates by the same amount as the Federal Reserve, though Kuwait did so by a smaller margin. Reuters called this a “less hawkish” move that could reflect Kuwait being relatively less concerned about inflation.
Higher bank rates tend to encourage saving and discourage spending, thus reducing the money supply in the country and therefore inflation.
What’s next: The Federal Reserve plans to raise rates several more times throughout the year.