The United Arab Emirates and Qatar lowered their benchmark interest rates on Thursday by a quarter point as Gulf states grapple with near-record inflation, matching a cut by the US Federal Reserve a day earlier. The move is needed to maintain the dollar pegs. The Fed has slashed rates seven times by a total of 3.25 percent since Sept. 18. “The case for currency reform is strong,'' Simon Williams, chief Middle East economist at HSBC Holdings Plc, said in a telephone interview from Dubai. “The inflationary pressures the Gulf faces not only demand a stronger currency, they also require an independent monetary policy. The issue is not going to go away, but I don't believe that change is close.'' Dollar pegs in all Gulf states but Kuwait compel their respective central banks to track the Federal Reserve to maintain the relative value of their currencies, even though inflation is spiraling and their economies are booming. The UAE, the second-largest Arab economy, reduced its overnight repurchase rate by 25 basis points to 2 percent on Thursday, the central bank said, keeping the rate on par with the Federal Reserve's Fed Funds rate. Kuwait, which severed its link to the ailing greenback last May to fight inflation, kept its interest rates - including its benchmark discount rate - unchanged as of 0555 GMT. Saudi Arabia and Qatar were expected to make interest rate decisions later in the day, while Bahrain's central bank is closed on Thursday for a Labor Day holiday. Oman sets interest rates at a weekly auction on Mondays. The UAE repo, introduced in November, is the Gulf state's benchmark and sets the rate at which banks borrow funds from the central bank. With interbank rates lower than the repo rate - the three-month Emirates Interbank Offered Rate (EIBOR) was 1.92 percent at 0550 GMT - most banks have no reason to borrow from the central bank. Inflation is accelerating across the Gulf, almost doubling in the six months to March to 9.6 percent in Saudi Arabia, the highest since at least the oil boom of the 1970s. UAE inflation hit a 19-year peak of 9.3 percent in 2006 and probably accelerated to 10.9 percent last year, according to an estimate by the National Bank of Abu Dhabi. Meanwhle, Gulf states are considering dropping their pegs to the dollar after the US currency's decline stoked inflation across the region, Kuwaiti Finance Minister Mustafa Al-Shimali said. “Yes, there are some'' Gulf Cooperation Council states considering dropping their pegs to the dollar, which has fallen 13 percent against the euro in the last 12 months, Al-Shimali said in an interview in Kuwait late Wednesday. “Some countries will do what we are doing.'' Al-Shimali didn't say which countries might end their pegs. Speculation of a change in Middle East currency systems eased this month after the United Arab Emirates and Qatar ruled out a revaluation or dropping the dollar peg. Inflation is running close to 10 percent in Saudi Arabia and the UAE, while Qatar's consumer prices rose 14 percent in the fourth quarter. The Kuwaiti dinar has appreciated 7.9 percent against the dollar since the nation dropped its peg to the US currency in May last year. The link to the dollar meant that imports in euros and other currencies that have strengthened against the dollar became more expensive. “Inflation is rising in the Gulf to a great extent because of loose monetary policy,'' said Marios Maratheftis, head of research for Standard Chartered Plc in the Middle East in a telephone interview from Dubai. “Tightening monetary policy can only happen if they drop their currency pegs or strengthen the currency, preferably both.''
