GCC central banks follow US Fed to hike interest rates as inflation bites

RIYADH, July 30 (Arab News): The central banks in the Gulf Cooperation Council (GCC) region increased the benchmark borrowing rates by three-quarters of a per centage point on Wednesday after the US Federal Reserve doubled down its fight to combat inflation.
The decision was made after the Fed increased the policy rate by 75 basis points, the fourth interest rate hike in the last four months, and the highest since 1994.
To restore price stability and fight inflation, the Saudi Arabia Central Bank, also known as SAMA, raised its repurchase agreement rate by 75 bps to 3 per cent, and its reverse repo rate by a similar margin to 2.50 per cent.
The central banks in the UAE, Qatar and Bahrain also raised their interest rates to 2.4 per cent, 3 per cent and 3.25 per cent, respectively.
The Central Bank of Kuwait, which ties its currency to a basket rather than just the dollar, also increased its discount rate by 0.25 bps to 2.50 per cent. The Central Bank of Oman also increased interest rates of local banks by 75 bps to 3 per cent.
Fawaz Al-Fawaz, a Saudi-based independent economist and columnist, however, believes that the rate hikes will not have a huge impact on a larger level.
"The effect on the macroeconomic picture is not likely to be significant given rates are rising from historically low levels and just reached the so-called 'normal' rates. At the macro level, specifically in public finance, the rate rise came as Saudi public finance improved immensely, hence the need to borrow declined," said Al-Fawaz.
He added: "The most likely effect of the growing debt on the consumers, especially the mortgages, could curtail their abilities to spend money on other things."
Contrary to Al-Fawaz's views, Riyadh-based analyst Abdullah Baeshen said that the recent developments will affect the Saudi Arabian economy like any other world economy.
"Higher cost for services and goods will change the attitude of customers. People will move away from goods like higher brands, luxury, assets, and sometimes, maybe to the most important services like healthcare, education and food," said Baeshen.
He added: "The higher inflation is coming because most of the goods come to the Saudi market from outside. Overall, I think we are going to see the government trying to control inflation more than controlling interest rates, as inflation affects all population, especially the low income."