Saudi Arabia joined Kuwait and Bahrain in lowering interest rates to ease credit conditions and underpin their banking systems on Thursday while the United Arab Emirates made a shock decision for the first time not to match a US interest rate cut. Saudi Arabia's move marked the second reduction of its benchmark repurchase rate this month alone. Saudi Arabian Monetary Agency (SAMA), the central bank – which had not lowered the repo rate in four years prior to October – said easing inflationary pressures and expectations made the cut possible. It cut the rate by 100 basis points to 4 percent. “The central bank's primary intention is to lower the cost of funding, which is a great concern for the private sector,” said John Sfakianakis, chief economist at SABB bank, HSBC's Saudi affiliate. The round of Gulf rate cuts was aimed at defrosting frozen interbank lending rates. But the UAE, which pegs its currency to the dollar, decided it was not a useful tool and left its rates untouched, despite the US Federal Reserve's 50-basis-point rate cut on Wednesday. The UAE had lowered rates earlier this month, following a similar move by the Fed. “We think cuts are not having the impact on local money markets and it is not meaningful at this point to cut,” a central bank official told Reuters. Qatar, which sat out the last round of rate cuts earlier in October, also did not move interest rates immediately. For much of this year, Gulf states had responded to Fed cuts by lowering only deposit rates while keeping their lending rates on hold to prevent lower borrowing costs from stoking record-high inflation. But the liquidity situation of Gulf banks has taken a 360-degree turn since the summer as the credit crisis spurred by defaults on US subprime mortgages spread across the world, prompting Gulf officials to unleash a policy responses. In contrast to the UAE, Kuwait and Bahrain lowered interest rates for the second time this month in a bid to defrost frozen lending markets. Kuwait, the only Gulf Arab state without a dollar peg, was forced to save its fifth-biggest lender from collapse earlier this week and its sovereign wealth fund has been pumping funds into a slumping local stock market. Bahrain slashed its repurchase and overnight rates to 3.50 percent from 4.75 percent – by a massive 125 basis points – on Thursday and said the move reflected current interbank lending rates. It also expanded acceptable collateral for overnight funds to include ijara sukuk, a type of Islamic bond.
