UPDATE 1-Qatar c.bank: keeping low interest rates a priority

Tue Sep 4, 2012 5:44am EDT

* Exposure of Qatari banks to Europe at 5 pct of aggregate assets

* Over 90 pct of funds placed with European banks is short-term

* Inflation expected to stay at comfortable level

DUBAI, Sept 4 (Reuters) - Qatar's central bank (QCB) said on Tuesday it wants to keep interest rates low to support lending to the real economy, and also reported that local banks have low exposure to the debt crisis-stricken euro zone.

" Pending a successful resolution of the sovereign debt problems in Europe, global liquidity conditions could tighten from increased risk aversion, which could have an impact on investments and project financing in Qatar," the central bank said in its 2011 financial stability review.

"In this context, sustaining the regime of soft interest rates through proactive liquidity management continues to remain a key priority for supporting growth."

The QCB cut its overnight deposit rate by a combined 75 basis points in April and August 2011 to a current level of 0.75 percent to discourage banks from parking excess money at its accounts, support lending in the real economy and bring the rate closer to its U.S. benchmark.

Since the Qatari riyal is pegged to the dollar, the central bank cannot keep too large a gap with U.S. rates without inviting capital inflows.

The QCB also took several steps to drain excess money last year. In January 2011 it issued a 50 billion-riyal ($14 billion) bond directly to local banks, and in May and August, it launched monthly auctions of 91-, 182- and 273-day Treasury bills.

As a result, available liquidity in the OPEC member's financial system dropped to a mere 5.8 billion riyals at the end of 2011 from 73.2 billion a year before, the review showed.

In its analysis of risks stemming from the euro zone turmoil, the central bank said that total exposure of Qatari banks to Europe was around 5 percent of their aggregate assets.

"Out of this, the banking sector's total investment in sovereign bonds and treasury bills is less than 1 billion riyals. As a result, the direct impact arising from possible sovereign debt default in the euro zone is negligible," it said.

But domestic banks have other significant exposures such as interbank assets, which make up around 4 percent of domestic banks' assets, the QCB said.

"However, the direct impact in case of any counterparty risk - 75 percent of the exposure become illiquid - is estimated to be around 20 percent of the liquid asset held by domestic banks," it said.

"The maturity structure of this asset class indicates that over 90 percent of the funds placed with European banks are short-term, i.e. with maturity up to three months."

Inflation in Qatar, the world's top liquefied natural gas exporter, was not a worry, while the macroeconomic fundamentals remain robust despite expected growth moderation in 2012, the QCB also said.

"Going forward, the persistence of excess capacity in the domestic housing market is likely to keep overall inflation at a comfortable level," it said.

Annual consumer price growth climbed to 2.2 percent in July, the highest level since October 2011, after hovering just above 1 percent for most of the first half of 2012.

Qatar's real gross domestic product jumped 14.1 percent in 2011 but the growth rate is expected to more than halve in 2012 partly due to a self-imposed moratorium on further expansion of the gas sector.

A Reuters poll in July forecast average inflation of 2.7 percent this year and economic growth of 6.3 percent.