MANAMA: The Central Bank of Bahrain (CBB) decision to raise interest rates is in keeping with its long-standing monetary policy, an expert has said.
Bahrain Centre for Strategic, International and Energy Studies (Derasat) director of economics and energy studies Dr Omar Al Ubaydli told the GDN that the kingdom operates a fixed exchange rate with the US dollar.
“This means that Bahrain’s monetary policy, including its interest rate policy, must be closely tied to the US monetary policy. The US Federal Reserve increased interest rates on Wednesday, due to the continuing strength of the US economy, as the Federal Reserve wishes to ensure that consumer price inflation stays under control,” he added.
According to Dr Al Ubaydli, the CBB’s decision to raise interest rates in parallel with the US is an action it has taken on many occasions in the last 20 years. This, he says, ensures stability in the economy.
“Bahrain’s fixed exchange rate policy has been a very positive feature of the economy, as it helps keep consumer price inflation low, and makes the economy more stable, which helps attract foreign direct investment (FDI).”
The CBB was joined by the banking regulators of Saudi Arabia and the UAE in raising interest rates on Wednesday following a rate increase by the US Federal Reserve.
The CBB said late on Wednesday that it has decided to raise its one-week deposit facility from 2.25 per cent to 2.5pc with immediate effect.
Bahrain’s banking regulator also said it was raising the overnight deposit rate from 2pc to 2.25pc and adjusting both the one-month deposit rate from 3pc to 3.25pc, and the lending rate from 4pc to 4.25pc.
Similarly, the Saudi Arabian Monetary Authority (Sama) said it was raising its reverse repo and repo rates by 25 basis points to 2.25pc and 2.75pc respectively.
The objective of policy rate adjustment is to maintain monetary stability amid global financial market developments, a Saudi Press Agency report said.
Meanwhile, Sama will continue to monitor and manage domestic system liquidity to ensure its adequate availability for smooth banking operations as well as to meet the domestic economic needs, it said.
The UAE central bank also announced it would raise its repo rate against certificates of deposits by 25 basis points.
The certificates are used as a monetary policy instrument through which changes in interest rates are transmitted to the financial institutions.
The decision by the three countries followed the announcement of a 25 basis point interest rate increase by the US Federal Reserve.
They all peg their currency to the US dollar and generally follow US monetary policy.
However, Kuwait’s central bank decided to keep its key discount rate unchanged at 3pc.
In contrast to the other Gulf states, Kuwait manages its dinar against an undisclosed basket of currencies in which the dollar plays a major role. This gives it more room to diverge from US policy if it believes domestic economic conditions warrant that.
Three months ago, when the Fed last raised rates, the Kuwait central bank also kept its key rate unchanged.
A quarterly report by the Economic Development Board (EDB), a semi-autonomous investment promotion agency, last month said the cost of capital in Bahrain has continued to edge up very gradually, to an extent in reflection of higher policy rates following the Fed hikes.
The average cost of conventional business loans was 5.9pc this May, as compared with 5.2pc a year earlier, while the cost of personal loans averaged 5.3pc in May, up on 4.3pc a year earlier.
The EDB’s chief economist Dr Jarmo Kotilaine told a media briefing last month that market expectations regarding US interest rates have been moving in a hawkish direction.
“US is well ahead of other major economies in monetary tightening and while America’s growth remains robust, global prospects are clouded by increased political risk and gradually tighter monetary conditions,” he had said.
avinash@gdn.com.bh
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