Thursday 15, June 2017 by Georgina Enzer

Federal Reserve raises interest rates, GCC countries react

The Fed raised its Federal Funds Rate by 25 basis points on 14 May 2017, resulting in several central banks' across the GCC either raising, or maintaining their rates.

The Central Bank of UAE (CBUAE), raising interest rates applied to the issuance of its Certificates of Deposits, in line with the increase in interest rates on USD, it also increased the Repo Rate applicable to borrowing short term liquidity from CBUAE against Certificates of Deposits by 25 basis points to 1.5 per cent.

The Saudi Arabian Monetary Agency (SAMA) decided to raise the reverse repo rate from 100 basis points to 125 basis points with immediate effect. The repo rate remains unchanged at 200 basis points, while the Central Bank of Kuwait (CBK) decided to keep the discount rate at its current value 2.75 per cent, a fixed rate since 16 March 2017. 

CBK announced that its board had made this decision to ensuring the competitiveness and attractiveness of the Kuwaiti Dinar as a store of domestic savings. According to Dr. Mohammad Yousef Al Hashel, Governor of the Central Bank of Kuwait, these savings constitute a major source of funding provided by the local banking and financial units to the various sectors of the national economy and thus maintain a supporting environment for sustainable economic growth and development.

The decision is also based on CBK’s continuous monitoring of the domestic market, taking into consideration movements in interest rates on major international currencies. The CBK Governor said that in light of the reduced oil price, somewhat limited local growth, and continued interest rate increases has meant that CBK is keen to formulate and implement its monetary policy orientations and choose appropriate tools and procedures to support further sustainable economic growth.

The Fed raised the US interest rate on the back of a strengthening labour market, and a moderate raise in economic activity so far in 2017. According to the Fed, US job gains have moderated but have been solid, on average, since the beginning of 2017, and the unemployment rate has declined.

“[US] Household spending has picked up in recent months, and business fixed investment has continued to expand. On a 12-month basis, inflation has declined and, like the measure excluding food and energy prices, is running somewhat below two per cent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance,” read the statement.

According to the Fed, it continues to expect that, with gradual adjustments in the stance of monetary policy, US economic activity will expand at a moderate pace, and labour market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below two per cent in the near term but to stabilise around the Committee's two per cent objective over the medium term. Near term risks to the US economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

The Fed raised the target range for the federal funds rate to one to 1-1/4 per cent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labour market conditions and a sustained return to two per cent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its objectives of maximum employment and two per cent inflation.

The Fed Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee currently expects to begin implementing a balance sheet normalisation programme this year, provided that the economy evolves broadly as anticipated.

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