The central bank cut its overnight deposit rate to 0.75% from 1% and axed the overnight lending and repo rate to 4.5% from 5%, a day after the US Federal Reserve decided to keep the rates low for another two years.
This is the third time in a year Qatar has cut rates. Last August, the central bank had cut its deposit rate by 50 basis points but left other rates unchanged.
The QCB deposit and lending rates are announced on overnight transactions between it and local banks through the Qatar Money Market Rate Standing Facility (QMR). The QCB lending is the key rate used by the central bank to convey signals to the market, revealing adjustments to its monetary policy stance.
QCB repo operations are conducted in domestic government securities and are of two-weeks to one-month maturity. The banking regulator sets the rate and duration of the repurchase agreements while the size and time of the repurchase transactions are initiated by commercial banks.
Given the fixed parity between the riyal and the dollar, QCB short-term interest rate policies have had to be subordinated to the fixed exchange rate policy. As such QCB overnight interest rates are closely related to its counterpart on the dollar, the Fed funds rate -- usually with positive margin, said the central bank in its website.
“Rates in Qatar were too high, leading to arbitrage opportunities as the riyal is pegged to the dollar… The cuts we are seeing this year are a normalisation,” Marios Maratheftis, chief economist for the Middle East and North Africa at Standard Chartered, was quoted as saying by Bloomberg.
The US Fed said on Tuesday that it would hold interest rates at record lows for at least two years and had held on to the record-low key lending rate since December 2008.
“They (QCB) are likely taking their cue from the Fed statement…We are entering a period of expansionary monetary policy where rates are coming because economic growth is in doubt in many parts of the world, particularly in the US and the Eurozone,” Farah Ahmed Hersi, senior economist at Masraf Al Rayan, was quoted as saying by Reuters news agency.
Market experts are of the view that the reduction in key interest rates should, in theory, enhance credit off take, especially to the private sector due to lower funding costs. However, tighter credit profiling, these days, is not imparting the required momentum when considering the overall economic growth of the country, they admit.
The total credit extended by commercial banks grew year-on-year by 9.47% with domestic credit gaining 10.06% and foreign credit by 1.58% in May.
The growth in credit came despite the QCB restrictions on personal borrowings by both nationals and expatriates. The banking regulator had capped lending to expatriates at QR400,000 and limited the borrowing for nationals at QR2mn. It has also capped personal loan rates at 6.5%, which according to bank officials, has thinned the net margins.
“The cut of overnight deposit and lending rates are part of the QCB’s efforts to stem this inflow of capital and add vigour to the local lending,” Akber Khan, a director at Al Rayan Investment, was quoted as saying by Bloomberg.
Banking sources said the (rate cut) might seem to improve the margins (with personal lending, which is the third largest segment within the banking industry’s credit portfolio) in theory, but in practice it would be a difficult situation because of the competition.
“The space to manoeuvre is limited,” an official of the bank told Gulf Times. But it (rate cut) has to be seen in totality with the overall broad monetary policy of the central bank although inflation is not a major cause of concern,” he said.
Qatar’s living costs, based on consumer price index, rose 1.8% year-on-year in June, according to Qatar Statistics Authority.
http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=452134&version=1&template_id=57&parent_id=56
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