Kuwait skips rate hike as liquidity lets it be flexible
16 Jun 2017 - 1:49
Dubai: The decision by Kuwait’s central bank not to hike interest rates this week, in contrast to other Gulf states, was due to the rapid improvement of liquidity in its banking system as well as concern about economic growth, analysts said.
After the US Federal Reserve raised rates by 25 basis points on Wednesday, the central banks of Saudi Arabia, the United Arab Emirates, Qatar and Bahrain all followed suit. Oman had already been raising its official rate gradually in line with market rates.
But Kuwait took a different tack, keeping its discount rate flat at 2.75 percent even though it had followed the Fed after the three previous US rate hikes since December 2015.
In a statement, the Kuwaiti central bank cited factors including low oil prices and its objective of supporting sustainable economic growth, saying it would use other tools and procedures, which it did not specify, to support the dinar currency.
The fact that Kuwait manages the dinar against a US dollar-denominated basket of currencies, rather than pegging it to the dollar as the other Gulf states do, gives it a little more flexibility to choose its own monetary policy.
It chose to exercise this flexibility because of sluggish growth, analysts said. The International Monetary Fund predicts the Kuwait economy will shrink 0.2 percent this year—partly because of a global deal among oil producers to cut output— after 2.5 percent growth last year.
“There’s an economic slowdown, and having raised the benchmark discount rate by 75 basis points since December 2015, they can afford not to raise it now,” said Dima Jardaneh, head of regional economic research at Standard Chartered.
In addition, an increase in banking sector liquidity over the past few months has reduced the need for Kuwait to maintain high interest rates to attract funds.
The spread of the three-month Kuwait interbank offered rate over the US dollar London interbank offered rate has shrunk to 38 bps from 69 bps at the start of this year.
“Domestic liquidity ... is doing very well, so the central bank is in no hurry to lift the rates,” said Nemr Kanafani (pictured), senior economist at the National Bank of Kuwait, the country’s biggest listed lender.
A leap in Kuwait’s trade surplus due to a rebound in oil prices has helped to push more petrodollars into the banking system. The surplus more than quadrupled from a year earlier to 1.63 billion dinars ($5.4bn) in the first quarter of 2017.