Gulf cuts some key rates as Qatar signals tightening

By Daliah Merzaban

DUBAI (Reuters) - Gulf Arab oil producers cut some interest rates on Thursday in line with a U.S. move, to ward off currency speculation, while Qatar signalled it could raise its benchmark lending rate as the region grapples with inflation.

Dollar pegs in all Gulf states bar Kuwait compel their respective central banks to track the Federal Reserve to maintain the relative value of their currencies, even though inflation is spiralling and their economies are booming.

On Thursday, Qatar and Bahrain cut their deposit facility and one-week deposit rates, respectively, to 2 percent -- in line with the U.S. fed funds rate following Wednesday's cut. They both kept lending rates steady at 5.5 and 5.25 percent, respectively.

The UAE central bank CBEM03 reduced its overnight repurchase rate -- the rate at which banks borrow from the central bank -- to 2 percent from 2.5 percent.

However, in its first such move during the Fed's easing cycle, the Qatar Central Bank said it could lift its benchmark lending facility rate, which stands at 5.5 percent, "in the future."

"Gulf states are taking the steps they can to dampen the impact of the inappropriate monetary stance that the dollar peg is forcing them into," said Simon Williams, regional economist at HSBC.

"The goal is to moderate liquidity growth without triggering flows onto the currency," he said.

The Saudi central bank, which communicates rate changes only to banks, had made no rate decision as of 1230 GMT on Thursday, bankers said. The world's largest oil exporter has a weekend on Thursday and Friday, and could announce changes on Saturday or Sunday.

REFORM BETS

After seven Fed cuts totalling 3.25 percentage points since September, most Gulf states have cut only deposit rates to maintain the relative value of their currencies.

Meanwhile, they've kept lending rates steady to prevent lower borrowing costs from stoking inflation, which is running at its highest in at least 30 years in Saudi Arabia, a 19-year high in the United Arab Emirates and just off a record in Qatar.

With limited policy tools to soak up liquidity, Gulf central banks have also been raising bank reserve requirements.

"Even though speculation on Gulf currency revaluations has come off since the beginning of April, Gulf countries don't want it to come back again," said Monica Malik, regional economist at Cairo-based investment bank EFG-Hermes.

Investors had piled into Gulf currencies beginning late last year on speculation some states in the world's biggest oil-exporting region would sever their links to a U.S. currency tumbling to record troughs against the euro.

That speculation has died down since Gulf central bankers decided at a meeting in Doha in April to get a monetary union project back on track to avert unilateral currency revaluations.