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Middle East central banks raise interest rates after Federal Reserve hike

UAE central bank raises rates on its certificates of deposit by 25 basis points

The central banks in the Middle East region have revised key interest rates in response to the US Federal Reserve’s decision to raise rates for the first time in nine years.

The lender of the last resort for the world’s biggest economy increased the Federal Funds rate by 0.25 percentage points on Wednesday (December 17). This means there will be an overnight change in banks’ charges for lending to each other.

Following the move, the UAE’s central bank decided to raise the interest rate on its certificates of deposit by 25 basis points on Thursday with immediate effect. The central bank issues these certificates as tools for liquidity management through which changes in interest rates are transmitted.

On Wednesday, Bahrain raised the interest rate on its overnight deposit facility to 0.50 per cent from 0.25 per cent, while Kuwait hiked its discount rate by 0.25 per cent to 2.25 per cent. Meanwhile, the Saudi Arabian Monetary Agency raised reverse repurchase rate by 25 basis points to 50 basis points but did not revise the repo rate.

The Federal Reserve’s move has already created ripples around the world and it is expected to have more repercussions across the global financial system as the US dollar is likely to strengthen.

Stock in the US and Asian markets rallied in response to the historic shift which signalled that the US has finally moved beyond the 2008 economic downturn.

“This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression,” remarked Fed Chairwoman Janet Yellen while announcing the rate hike.