UPDATE 2-Yemen slashes interest rates to three-year low to spur recovering economy

Thu Feb 7, 2013 7:47am EST

* Deposit rate reduced by 300 bps to 15 pct

* Central bank last cut rate in October 2012

* Economy improves, inflation falls to single digits

By Mohammed Ghobari

SANAA, Feb 7 (Reuters) - Yemen's central bank slashed its main interest rate by 3 percentage points to a three-year low on Thursday following a sharp decline in inflation as it seeks to consolidate economic recovery in the volatile Arab state.

The poorest country on the Arabian Peninsula and torn by unrest and clashes with Islamic insurgents linked to al Qaeda, Yemen has overcome high inflation which fell from a peak of 25 percent in October 2011 to 5.5 percent last November, the latest available data.

Thursday's rate cut was the first since October, when the central bank began an easing cycle, and should support the economy, which stabilised last year after shrinking 10.5 percent in 2011 when political unrest caused fuel and electricity shortages and there were frequent attacks on oil pipelines.

The International Monetary Fund, which sees the economy growing 4 percent this year, said last month that Yemen had room to gradually reduce interest rates to support economic growth.

It warned however that the political transition, following the overthrow of President Ali Abdullah Saleh last February, and security concerns, particularly attacks on key oil and electricity facilities, posed risks to the economic outlook.

In a statement carried by state news agency SABA on Thursday, the central bank said it cut its deposit rate, the main rate used to adjust monetary policy, by 3 percentage points to 15 percent, its lowest since March 2010.

The bank had trimmed the rate, a benchmark for commercial banks taking deposits from their customers, in October, by 2 percentage points as inflation came down to single digits and the Yemeni rial stabilised as political turmoil eased.

"The rate reduction comes ... especially with regard to inflation, which stabilised at 5.8 percent during the last quarter of 2012 compared to 23 percent in 2011," central bank Governor Mohammed Bin Humam said in Thursday's statement.

The Yemeni rial tumbled to about 243 to the U.S. dollar in 2011 during a year of unrest which led to the rise of al Qaeda militants and ultimately toppled President Saleh last year. Some violence continues, but the currency has now stabilised at around 215 to the dollar.

Yemen depends on crude oil exports for about 60 percent of its budget income, and its finances have been shaken by frequent bombings of oil and gas pipelines by insurgents or tribesmen.

Donor aid, however, increased last year thanks to Saudi Arabia and the IMF resumed lending to Yemen last April, approving a $93.7 million loan.

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