GCC central banks cut interest rates: Three reasons to take after the Fed

Introduction:

The central banks of the Gulf Cooperation Council (GCC) countries have taken steps to imitate the Fed, which were cut by 0.25% earlier than expected. Fed Chair Jerome Powell stated that cuts have come in accordance with the weakened job market indicators, which in turn can bring inflation down as well.

Alongside the Fed meeting, the quarterly report was released. The report indicated the possibility of the Fed cutting rates by half a basis point by the end of this year. While the previous reports in March and July directed to two cuts for this year.

The Gulf central banks flock to cut interest rates

Several central banks across the Gulf region have cut their respective countries’ benchmark interest rates, not long after the Fed did. Saudi Arabia, for instance, had cut its repo rate by 25 basis points. to 4.75%. As for the country’s reverse repo rate, it has been reduced by the same percentage point to 4.25%.

In the United Arab Emirates, the central bank lowered the base rate on overnight deposit facilities from 4.4% to 4.15%. While its Kuwaiti counterpart cut the discount rate from 4% to 3.75%.

In Bahrain, the central bank reduced the overnight deposit rate to 4.75%, and Oman’s state news agency reported that the central bank would lower the repo rate with local banks to 4.75%, effective the same day.

Three reasons behind Gulf central banks'

This move to cut rates just after the Fed does is not new for central banks in the Gulf for several reasons. Some are currency-related, while others are country-specific.

First, GCC currencies pegged to the USD

One big reason for the central banks in many Gulf countries to shadow the decisions of their American counterpart is the fact that their currencies are pegged to the US dollar. 
Such a move to lower rates in accordance with the US also indicated the GCC members looking to be in tune with the global monetary policy apparatus. Thus, building stronger consumer confidence in Gulf markets. 

Second, inflation and economic growth in the GCC

The main reason behind this rate cut move, however, is the aim to lower inflation in these particular countries and record good economic growth results for this year and the next. As highlighted in the Arab Monetary Fund’s recent report “Arab Economic Outlook 2025.”

The fund’s report projected the Gulf economies’ ability to lower inflation rates by the end of this year and throughout next year, while maintaining relatively good growth rates as well, demonstrated in the numbers herein:
 

Based on these projections, lower interest rates are expected to reduce borrowing costs for companies and individuals, thereby supporting investment, spending, and overall economic growth.

Third, supporting the gulf states’ economic trajectories

GCC central banks cutting interest rates at the moment comes hand in hand with these states’ visions for their economies’ futures. The move is meant to encourage investments, as envisioned by Saudi Arabia’s 2023 vision, for example. as well as the UAE’s and Kuwait’s. The visions focus on increasing investments in non-oil sectors in particular, which have shown great growth and potential this year across the region.  
 

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