The impact of the Fed rate cut is spreading! With oil prices under pressure, the Gulf central bank is closely following the rate cut trend.

Policy makers in Gulf countries are following the footsteps of the Federal Reserve, taking interest rate cuts for the first time since the outbreak of the Covid-19 pandemic to alleviate the impact of falling oil prices on the energy-rich region. On Wednesday, the central banks of Saudi Arabia, the United Arab Emirates, and Bahrain responded to the Federal Reserve's interest rate cut by lowering rates by half a percentage point. Qatar was even more proactive, lowering rates by 55 basis points. Meanwhile, Kuwait, whose currency policy is not solely dependent on the US dollar but is pegged to a basket of currencies, also cut its discount rate by 25 basis points. This move came after the Federal Reserve unexpectedly announced a 50 basis point interest rate cut, bringing the benchmark rate down from a high of 5.25%-5.5% to a range of 4.75%-5%. This is the first interest rate cut by the Federal Reserve in over four years, as previous high rates successfully suppressed inflation but also increased borrowing costs for US consumers. Federal Reserve officials also expect to cut rates by another 50 basis points at the November and December meetings and plan to cut rates four times by 2025 and twice by 2026. The Federal Reserve expressed confidence in overcoming inflation and expects inflation to continue moving towards the 2% target. Details of interest rate cuts in the Gulf region are as follows: - Saudi Arabia: Repurchase rate cut by 50 basis points to 5.5%, reverse repurchase rate cut to 5%. - United Arab Emirates: Overnight deposit rate cut by 50 basis points to 4.9%. - Qatar: Repurchase rate cut by 55 basis points to 5.45%, loan rate cut to 5.7%, deposit rate cut to 5.2%. - Kuwait: Discount rate cut by 25 basis points to 4%. - Bahrain: Overnight deposit rate cut by 50 basis points to 5.5%. Despite relatively low inflation rates in the Gulf region, policymakers have limited choices in monetary policy due to policies linked to the US dollar. They typically align with the decisions of the Federal Reserve and have closely monitored the Fed's interest rate hikes since the economic turmoil triggered by the Covid-19 pandemic. Monica Malik, Chief Economist at Abu Dhabi Commercial Bank, pointed out before the Federal Reserve rate cut that Gulf countries do not need high rates like the US since inflation in the region is mostly at 2% or below. She believes that the rate cut cycle will be welcomed as weak oil price prospects increase the financing needs for some countries in the region and their investment plans. For the Gulf region, which heavily relies on energy production, the decrease in oil prices is more crucial than the relaxation of monetary policy. This month, Brent crude oil prices have dropped by nearly 8% to around $72 per barrel, well below the levels needed for several countries in the region to balance their budgets. For Saudi Arabia, the largest economy among the six GCC member countries, an interest rate cut may provide some relief. The borrowing costs measured by the three-month Saudi Interbank Offered Rate (Saibor) had already decreased before the Federal Reserve cut, falling below 6% for the first time this year. Saudi Arabia is implementing the "Vision 2030" diversification plan advocated by Crown Prince Mohammed bin Salman, which requires billions of dollars of investment, with some funds coming from oil revenue, but the government still needs to attract foreign investment and borrowing. Ziad Daoud, Chief Emerging Markets Economist at Bloomberg Economics, commented that the larger the interest rate cut in the Middle East and North Africa region, the greater the inflow of capital seeking higher returns, oil demand, and boost from simultaneous interest rate cuts in Gulf countries. Malik of Abu Dhabi Commercial Bank believes that the impact of interest rate cuts in GCC member countries will be limited until 2024 and will take time to reflect on bank loan rates, but by 2025, it should provide support, especially as more cuts occur.