First repurchase rate set by UAE central bank

by Richard Kilner

Story link: First repurchase rate set by UAE central bank

The UAE central bank has effectively raised borrowing costs by setting its overnight repurchase rate to 4.75%. It is presently under pressure to lower rates to enable it to maintain its currency peg to the US dollar.

There is no benchmark interest rate in the UAE, and had previously changed interbank borrowing rates through the sale of dirham-denominated certificates of maturities from one week to 18 months.

This changed when new financial policy tools were put into practice on Wednesday. The UAE central bank has said that, as part of the change, it would permit the nation’s first repurchase agreements, setting the lending rate for banks.

Yesterday the rate was set at 4.75%, 25 basis points higher than any of the certificates of deposit rates which were set under previous policy scheme on Tuesday.

Monica Malik, the regional economist at Dubai-based ivnestment bank EFG-Hermes, described the move as a form of monetary tightening, adding that the rate set indicated that the UAE central bank wanted to slow down the growth in credit.

The Gulf states are enjoying an economic boom as America is suffering a downturn. many Gulf states have currencies pegged to the dollar, forcing them to adopt US monetary policy despite the contrasting economic outlooks.

In an effort to lessen the consequences of the credit crunch the US Federal Reserve has slashed its benchmark rate (set in September) by 75 basis points, from 18% to 4.5%.

At the same time the National Bank of Abu Dhabi has predicted the assets it manages will double to a value of more than $3bn in 2009 as the markets in the Middle East expand.

Nazem Al Kudsi, chief investment officer for asset management of the National Bank of Abu Dhabi, explained that the regional markets were growing very quickly and that, combined with the bank’s expertise, was making the firm feel very confident.

The bank is the largest asset manager in the UAE, managing assets valued at around $1.6bn.