Fed cuts are a small but welcome relief for the GCC

GULF COUNTRIES - In Brief 01 Aug 2019 by Rory Fyfe

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GCC central banks have mainly followed the Fed lower, in keeping with usual behaviourThe rate cuts come as a small but welcome relief for fiscal policy and to support credit growth, after a number of years of rate hikes amidst slowing economic growthHighly leveraged economies and sectors will be the most impacted, such as the Dubai property market, whereas Saudi Arabia, with its low private debt levels, is less sensitive to interest rates All of the GCC economies have followed the Fed’s 25 basis point cut, with the exception of Kuwait and Oman. This is in keeping with the usual behaviour of central banks in the region who move interest rates in line with the Fed to maintain the stability of their pegs to the US dollar. GRAPH 1: GCC policy rates usually move in line with the Fed GCC central bank and Federal Reserve policy rates (percentage points, %) Source: GCC Central Banks and Federal Reserve Kuwait stated that it was keeping its rate unchanged. Kuwait did not follow the Fed when it hiked rates in September 2018 either. Kuwait also has slightly more flexibility than other GCC countries as its currency is pegged to a basket of major currencies, not only the US dollar. Oman does not announce an official policy rate, but its repo rates do tend to track the Fed and had been tracking downwards in recent months in anticipation of looser US policy. The GCC has suffered in recent years as it has been out of sync with the US economic cycle. GCC economies slowed following the 2014-16 drop in oil prices, whereas the Fed had been hiking rates since the end of 2015. GCC central banks broadly followed the Fed higher in 2015-18, but reluctantly. Qatar, Saudi and Kuwait all increase...