(MENAFN- Muscat Daily) Muscat -
As most central banks in the GCC last week reduced their key policy rates following the US Fed decision, this is expected to speed up economic recovery and give a boost to business activity in the region.
Last week, the US Fed cut the overnight lending rate by 25 basis points (bps) for the first time since 2009 and hinted it may cut again this year. The GCC central banks largely move in lockstep with the US to protect their currencies' peg to the dollar. But as the Fed raised rates nine times since 2015, the GCC central banks were unable to lower interest rates to help weather the effect of lower oil prices on their economies.
Most GCC central banks instantly followed the US Fed and cut their key policy rates.
The central banks in Saudi Arabia, the UAE, Qatar and Bahrain cut their benchmark interest rates by 25bps.
Kuwait, the only GCC country with a basket-pegged currency, kept its policy rate on hold, as has been the case in the past 12 months.
The Central Bank of Oman may maintain the 50bps spread between its policy rate and the one-month Libor rate, according to the Institute of International Finance (IIF).
'The latest cut in interest rates would help the economic recovery process in GCC countries. Monetary easing would make borrowing cheaper for investors. Lower interest rates will make credit more available to the private sector and provide a window of opportunity for companies to refinance loans at a lower cost. Despite lower oil prices, liquidity conditions in the region still look healthy,' IIF said in a report.
IIF projects GCC non-oil growth to pick up from 2.1 per cent in 2018 to 2.8 per cent in 2019 and 2.9 per cent in 2020. It said, if lower interest rates are accompanied by softening of the US dollar, there is risk of further decrease in the GCC real estate prices.
'A cut in policy rates would lead to lower mortgage interest rates, making it more attractive for potential home-buyers while easing the debt burden on existing borrowers.'
With lower interest rates, both GCC governments and private sectors will have an opportunity to tap capital markets at a lower cost, which could give new breath to large infrastructure projects, the IIF said.
'Solid bond returns, capital markets upgrades, and improving fundamentals provide the GCC with the opportunity to attract higher foreign inflows and refinance maturing debt at a lower cost,' it added.
IIF expects higher pressure on the net interest margins of the GCC banks, especially those with a higher focus on consumer lending.
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