The effect of the Fed's interest rate cut spreads! As oil prices are under downward pressure, the Gulf Central Bank follows the pace of interest rate cuts

Gulf policymakers followed the Federal Reserve's lead and cut rates for the first time since the outbreak of the coronavirus pandemic to cushion the impact of falling oil prices on the energy-rich region. On Wednesday, central banks in Saudi Arabia, the United Arab Emirates and Bahrain cut rates by half a percentage point in response to the Fed's decision. Qatar was more aggressive, cutting rates by 55 basis points. Meanwhile, Kuwait, whose monetary policy is not entirely dependent on the dollar but is pegged to a basket of currencies, also cut its discount rate by 25 basis points.

The move came after the Federal Reserve unexpectedly announced a 50 basis point rate cut, lowering its benchmark rate to a range of 4.75% to 5% from a 20-year high of 5.25%-5.5%. It was the first rate cut in more than four years by the Fed, which has successfully curbed inflation with high interest rates but has also increased borrowing costs for American consumers. Fed officials also expect another 50 basis point cut in the benchmark rate at the next November and December meetings, and plan four rate cuts by 2025 and two in 2026. In its statement, the Fed expressed confidence in defeating inflation, expecting inflation to continue to move toward its 2% target.

Details of the rate cuts in the Gulf region are as follows:

- Saudi Arabia: Repo rate cut by 50 basis points to 5.5%, reverse repo rate cut to 5%.

- UAE: Overnight deposit rate cut by 50 basis points to 4.9%.

- Qatar: Repo rate cut by 55 basis points to 5.45%, loan rate cut to 5.7%, deposit rate cut to 5.2%.

- Kuwait: Discount rate cut by 25 basis points to 4%.

- Bahrain: Overnight deposit rate cut by 50 basis points to 5.5%.

Despite relatively low inflation in the Gulf region, policymakers have limited options for monetary policy due to their dollar-pegged policies. They generally align with the Fed's decisions and have been closely following the Fed's rate hikes since the COVID-19 pandemic triggered economic turmoil.

Monica Malik, chief economist at Abu Dhabi Commercial Bank, noted before the Fed's rate cut that Gulf countries don't need interest rates as high as in the United States because inflation in the region is mostly at or below 2%. She believes that the rate cut cycle will be welcomed because the weak outlook for oil prices has increased the financing needs of some regional countries and their investment plans.

For the Gulf region, which relies heavily on energy production, lower oil prices are more critical than monetary policy easing. This month, Brent crude prices have fallen nearly 8% to about $72 a barrel, far below the level needed for several countries in the region to balance their budgets.

For Saudi Arabia, the largest economy among the six Gulf Cooperation Council members, lower interest rates may bring some relief. Borrowing costs, measured by the three-month Saudi Interbank Offered Rate (Saibor), had fallen before the Fed's rate cut, falling below 6% for the first time this year.

Saudi Arabia is implementing the "Vision 2030" diversification plan advocated by Crown Prince Mohammed bin Salman, which requires hundreds of billions of dollars in investment, partly funded by oil revenues, but the government also needs to attract foreign investment and borrowing.

Ziad Daoud, chief emerging markets economist at Bloomberg Economics, commented that for the Middle East and North African countries, the greater the rate cut, the greater the boost from capital inflows seeking higher returns, oil demand and synchronized rate cuts in the Gulf countries.

Malik of Abu Dhabi Commercial Bank said that the impact of rate cuts in GCC countries will be limited in 2024 and will take time to be reflected in bank lending rates, but it should be supportive in 2025, especially as more rate cuts occur.