Baghdad-Mil
The “monetary easing” journey began in most central banks around the world, after the US Federal Reserve lowered the federal funds interest rate, and many banks followed suit, including the Gulf countries .
On Wednesday, the US Federal Reserve cut federal funds rates by 50 basis points to a range of 4.75% – 5%, in the first cut since March 2020 .
Immediately, the central banks in the Arab Gulf states announced a reduction in interest rates by varying percentages, following the US Federal Reserve in reducing them, amid expectations of further monetary easing in the coming months .
US and global markets feared that cuts of less than 50 basis points would stoke fears of a further slowdown in the already sluggish US labour market .
The Central Bank of the UAE decided to reduce the “base rate” on overnight deposit facilities by 50 basis points to 4.90 percent, while the Saudi Central Bank announced a reduction in the repurchase agreement (repo) rate by 50 basis points to 5.50 percent, and a reduction in the reverse repurchase agreement (reverse repo) rate by 50 basis points to 5 percent .
Qatar Central Bank also decided to reduce interest rates by 55 basis points on deposits, lending rates and repurchase (repo) rates to 5.20 percent, 5.70 percent and 5.45 percent respectively .
The Central Bank of Bahrain announced a reduction in the interest rate on overnight deposits by 50 basis points from 6.00 percent to 5.50 percent .
Meanwhile, the Central Bank of Kuwait decided to reduce the discount interest rate by 25 basis points from 4.25 percent to 4 percent .
What does the decision mean?
The decision to lower interest rates means that the markets will witness more money being pumped into the US and global markets alike, especially since the dollar is a global payment, trade and investment currency .
With the reduction of interest rates on the dollar, central banks whose currencies are pegged to the dollar, and even those that are not pegged to it, will follow the same direction as the Federal Reserve, to keep the attractiveness of their currencies strong against the dollar by moving in one direction with the movement of interest rates on the dollar .
In this case, several factors will occur that will stimulate markets and investment, most notably that the world will witness more borrowing due to the decline in interest rates, after nearly two and a half years of high interest rates .
More borrowing means that cash will go either towards investment or consumption, or both, and ultimately contribute to increased production, consumption and employment .
Another issue is that a mass of money that was deposited in banks by individuals and companies and on which they were receiving monthly or annual returns will leave the banks, either to be invested directly, or to buy shares or gold .
This applies to most global markets, which have seen negative expectations from the International Monetary Fund regarding a slowdown in their economic growth this year, due to the negative economic mood and geopolitical tensions .
The third thing is that lowering interest rates under the current conditions of the US economy will be positive for investors, and since the US economy is the largest in the world and constitutes about 24 percent of the global gross domestic product, the health of the economy will be reflected in global markets.
No comments:
Post a Comment