Kuwait’s central bank has cut interest rates on some monetary policy instruments in an effort to ease pressure on the currency while helping the economy cope with the impact of the Covid-19 pandemic.
In a surprise move, the central bank also said it would keep the discount rate at 1.5%, maintaining the existing cap for loans extended to customers in Kuwaiti dinars. At the same time, it lowered by 0.125% the repo rate and yields on term deposits, direct intervention instruments and public debt instruments across the entire yield curve up to the 10-year term. The change came into effect on Wednesday.
“Cutting the repo rate should drive further improvement in Kuwaiti banks’ cost of funding, which was elevated last year, and support the margin outlook,” said Bloomberg Intelligence analyst Edmond Christou. “Any support is welcome given the pressure Kuwaiti banks are facing on revenues from Covid-19 relief measures and on the bottom line from stringent reserving requirement.”
Central banks across the Gulf reduced interest rates in March to bolster stimulus after the US Federal Reserve lowered its benchmark to near zero to counter the economic fallout of the coronavirus.
Kuwait, which pegs the dinar to a basket of currencies dominated by the US dollar, cut to 1.5% and was the only Gulf country that matched the Fed’s unexpected decrease of a full percentage point. Its neighbours opted for smaller reductions.
The central bank said in a statement that the latest decision was made because the decrease in Fed rates to near zero had bolstered “the attractiveness of the Kuwaiti currency.”
The move was also in line with its measures to cope with the ramifications of the Covid-19 pandemic on the economy and banking system, it said.
The repo is used to price deposit and discount rates for loan repricing. In Kuwait’s case, the bank previously cut the discount rate more than the repo in order to support corporates by offering lower borrowing costs. It simultaneously kept the deposit rate in a better position versus the Fed cuts to avoid an outflow of deposits.
The central bank earlier this month affirmed its commitment to the country’s exchange-rate policy, responding to reports of an impending devaluation. Kuwait is facing the highest budget deficit in its history, brought on by the drop in oil prices and the coronavirus pandemic.
A potential solution to its liquidity crisis has been blocked by parliamentary opposition to a law that would allow the government to borrow.
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