Gulf states follow US rate rise at risk of hitting borrowing

The Gulf’s dollar-pegged economies have followed a US interest rate hike to maintain the value of their currencies but at the risk of denting efforts to stimulate their flagging economies. Saudi Arabia, the United Arab Emirates, Qatar and Bahrain all raised their key benchmark interest rates by 25 basis points after the move by the US Federal Reserve late on Wednesday.

Only Kuwait, whose dinar is pegged to a broader basket of currencies, held out, as it battles to boost its economy which is forecast by the International Monetary Fund to shrink by 2.1 percent this year. The Saudi central bank said it was raising one of its benchmark rates to 1.5 percent although that was counterbalanced by a government announcement of $19.2 billion in stimulus funds for the private sector.

The kingdom reported a negative inflation rate in October and economic forecasts say the region’s largest economy is likely to shrink this year. The United Arab Emirates central bank raised its benchmark short-term borrowing rate to 1.5 percent while Bahrain raised its key rate to 1.75 percent and Qatar raised its to 2.5 percent.

The Kuwaiti central bank kept its main discount rate at 2.75 percent. There was no immediate word from Oman. Raising interest rates is a tool normally used to cool heating economies and check inflation but the Gulf states are suffering from the reverse problem economic contraction and deflation.

Gulf oil exporters have been hit hard by the slump in world prices for crude, which provided a major part of their finances. Huge budget deficits have forced them to cut public spending and seek to restructure their economies away from oil. They have all been keen to boost lending to expand their private sectors.

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