Following the US Federal Reserve’s decision to increase rates, the Central Bank of the UAE (CBUAE) has decided to raise the base rate for the overnight deposit facility (ODF) by 50 basis points (bps), effective May 5, 2022. This is the second time the rates have been raised this year.
The UAE Central Bank’s base rate, which is tied to the US Federal Reserve’s IORB, reflects the CBUAE’s overall monetary policy stance. The UAE Central Bank has also decided to keep the cost of borrowing short-term liquidity from the CBUAE via all standing credit facilities at 50 bps over the base rate.
The Fed’s move to raise its benchmark rate by a half-percentage point is the greatest since 2000 and the second in less than three months, as the world’s largest economy tries to rein in skyrocketing inflation, which has reached its highest level since 1981. The Fed’s interest on reserve balances (IORB) serves as the basis for the base rate. It serves as an effective interest rate floor for overnight money market rates.
With the exception of Kuwait, whose dinar is tied to a basket of currencies, most central banks in the Gulf Co-operation Council’s six-member economic bloc follow the Fed’s key interest rate adjustments due to their currency pegs to the US dollar.
In line with the Fed’s move, Bahrain’s Central Bank increased its key policy rate on its one-week deposit facility by 50 bps to 1.7%. Kuwait’s Central Bank also announced on Wednesday that it had raised its discount rate by 25 bps to 2%, in line with the US Federal Reserve’s rate hike. The Saudi Arabian Monetary Agency (SAMA) increased its repo and reverse repo rates by 50 bps each, to 1.75% and 1.25%, respectively. The Central Bank of Qatar said that its deposit and repo rates would be raised by 50 bps to 1.5% and 1.7%, respectively, starting on Thursday. It will raise its loan rate by 25 bps to 2.75%.
