UAE joins global emergency rate action

The UAE Central Bank yesterday cut the borrowing rate on its emergency facility to 1.50 percentage points over the repurchase, or repo, rate from the earlier 3.00 percentage points.

It is also expected to cut the repo rate after the United States Federal Reserve and five other nations cut their benchmark rates.

The UAE apex bank also cut to 3.00 percentage points over repo from the earlier 5.00 percentage points the rate at which banks can borrow above their reserve requirements.

Six countries, including the United States, yesterday slashed their benchmark lending rates in an emergency move co-ordinated by the US Federal Reserve.

The Bank of Canada, the Bank of England, the European Central Bank, Sveriges Riksbank and the Swiss National Bank joined the Fed in reducing their rates by 50 basis points.

The Bank of Japan did not do the same, but expressed its strong support of these policy actions, according to a joint statement by these central banks.

The Fed's decision brought its benchmark rate to 1.50 per cent. The ECB's main rate is now 3.75 per cent, Canada's 2.50 per cent, the United Kingdom's 4.50 per cent and Sweden's 4.25 per cent. The UAE is expected to mirror the Fed move and reduce its repo rate to 1.50 per cent.

In an unrelated decision, China cut interest rates for the second time in three weeks to 6.93 per cent.

"Inflationary pressures have started to moderate in a number of countries, reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability," the statement said.

The Federal Open Market Committee (FOMC) led by Fed Chairman Ben Bernanke said it decided on the rate action "in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures", according to the joint statement.

"Inflation has been high, but the committee believes that the decline in energy and other commodity prices and the weaker prospects for economic activity have reduced the upside risks to inflation," the FOMC said.

On the other hand, the UAE's economy continues to grow strongly and inflation is high. But its peg to the US dollar will force it lower the repo rate to 1.50 per cent.

UAE can withstand liquidity squeeze

The UAE has strong credit fundamentals to withstand liquidity squeeze as the country is only tangentially related to the global credit crunch, global rating agency Standard and Poor's said.

"While financing conditions are becoming more challenging, we don't consider that the creditworthiness of rated domestic entities will be affected," said Standard & Poor's Credit Analyst Farouk Soussa.

"If liquidity conditions remain tight, funding future projects will, however, become more difficult, thereby affecting the UAE economy's hitherto extraordinary growth," he said. The report notes that a cooling in growth would not necessarily be a bad thing as it could alleviate infrastructure and resource. "If this tightening starts to bite too hard, we believe the UAE has the resources to ease liquidity constraints at short notice," said Soussa.

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