Doha: With the US Fed cutting the overnight lending rate by 25 basis points for the first time since 2009 and hinting it may cut again this year, most central banks in the region instantly followed the Fed and cut their key policy rates. Qatar is expected to cut its policy rate in the next few months, according to Institute of International Finance (IIF).
The GCC countries follow the Fed and cut their key policy rates, as their currencies are pegged to the US dollar.
The IIF noted non-oil GDP growth in the GCC decelerated significantly following the sharp decline in oil prices in 2015 and the subsequent fiscal adjustment. At the same time, monetary policy tightening in the US, which started in late 2015 posed additional policy challenges to the authorities in the GCC. The impact of tight monetary stance on private sector growth has also been compounded by the escalation of regional tensions. Against this background, the latest cut in interest rates would help the economic recovery process.
Monetary easing would make borrowing cheaper for investors. Lower interest rates will make credit more available to the private sector and provide a window of opportunity for companies to refinance loans at a lower cost. Despite lower oil prices, liquidity conditions in the region still look healthy except Oman. IIF expects higher pressure on the net interest margins of the GCC banks, especially those with a higher focus on consumer lending. With tighter margins, M&A activity in the banking sector is likely to continue. While NPLs in the region remain low, they have increased moderately in the past three years.
If lower interest rates are accompanied by softening of the US dollar the risk of further decrease in the real estate prices will decrease. A cut in policy rates would lead to lower mortgage interest rates, making it more attractive for potential homebuyers while easing the debt burden on existing borrowers.
Interest rate cuts combined with some softening of the US dollar could boost inflows into emerging markets, including to the GCC. With lower interest rates, both governments and private sectors will have an opportunity to tap capital markets at a lower cost, which could give new breath to large infrastructure projects. Solid bond returns, capital markets upgrades, and improving fundamentals provide the GCC with the opportunity to attract higher foreign inflows and refinance maturing debt at a lower cost.
Forward rates point to no significant pressure on the GCC currencies’ peg to the dollar, which is expected to be maintained as a safeguard of economic stability.
Source from: The Peninsula Qatar