Arabian Gulf Business Insight - Fed interest rate pause will help GCC non-oil sector

The decision by the US Federal Reserve to leave policy rates unchanged will have a positive impact on the non-oil sectors of Gulf Cooperation Council (GCC) countries, according to leading economists.

The Fed has announced 11 rate hikes since March 2022, but on Wednesday decided to hold its benchmark rate steady, albeit at a 22-year high.

Officials also indicated that another rate rise is possible from the two remaining meetings to be held between now and the end of December and warned of fewer cuts in 2024.

The central banks of the UAE and Qatar, whose currencies are pegged to the dollar, mirrored the Fed’s decision to pause.

“This move is expected to foster greater exchange rate stability in these [GCC] nations, given their fixed or semi-fixed exchange rate regimes linked to the US dollar,” said Ali Metwally, Mena economist and director of economic intelligence at ITI consulting.

The overnight deposit facility will remain unchanged at 5.4 percent as of September 21, 2023, the Central Bank of the UAE said.

The rate for borrowing short-term liquidity through all standing credit facilities will remain 50 basis points above the base rate.

Qatar’s central bank announced to keep the repo rate unchanged at six percent, the lending rate at 6.25 percent, and the deposit rate at 5.75 percent.

It comes as the price of Brent crude oil hit $95 a barrel this week.

James Swanston, Meana economist at Capital Economics in London, told AGBI: “Given that oil prices are higher, this will improve the backdrop for non-hydrocarbon sectors as stronger oil and gas revenues to governments allows them to sustain accommodative fiscal policy.

“With lower interest rates on the horizon in 2024 too, this should help to boost lending within economies to boost non-oil activity.”

The region’s non-oil sector is forecast to grow 4.6 percent this year, driven by private consumption, fixed investments and looser fiscal policy in response to 2023’s relatively high oil revenues, according to the World Bank.

“Higher interest rates are typically negative for economic growth, but the UAE, due to solid demographics, strategic location, diversification, and thriving tourism, is better positioned to absorb rate hikes than other major economies,” said Vijay Valecha, chief investment officer at Century Financial.

The funds rate is projected to hover between 5 percent to 5.25 percent at the end of this year, up from the 4.6 percent announced in June.

While Fed officials expect to cut interest rates only twice next year, compared to the four rate cuts forecast back in June.

Scott Livermore, chief economist at Oxford Economics Middle East, said: “We anticipate the Fed to start cutting rates in mid 2024 and then only slowly.

“This means that the GCC will have to become accustomed to higher rates for some time yet.”

In a statement, the committee of the Federal Open Market Committee said it remained “highly attentive to inflation risks”.

Officials estimated core inflation will stand at around 3.7 percent for 2023, down from a previous prediction of 3.9 percent. And while next year their forecast remained at 2.6 percent, they said inflation would only hit the Fed’s target of 2 percent by 2026.

The average consumer price inflation for the entire GCC region for 2023 was projected at 2.6 percent, according to Statista.

“We aren’t surprised by the hawkish tone, but we think continued improvement in inflation and an ongoing cooling in labour market conditions will keep the Fed on the sidelines,” added Livermore.