DUBAI: Gulf Arab central banks followed the United States Federal Reserve (Fed) and raised interest rates by a quarter percentage point for the first time since 2018, though higher oil revenues mean governments can spend more to cushion the impact of increasing borrowing costs.

       Policymakers in countries including Saudi Arabia and the United Arab Emirates (UAE) tend to match the Fed’s decisions to protect their currencies’ pegs to the US dollar.

       While price pressures in the region aren’t as severe as in the US, where inflation is at the highest in four decades, the strength of the post-Covid rebound warrants monetary tightening, according to Oxford Economics.

       “The economies of the region are robust and will be resilient to tighter monetary policy, and with inflation rising, higher interest rates are also probably needed,” said Scott Livermore, chief economist for the Middle East at Oxford Economics.

       “If the Fed moves faster than some countries feel comfortable with, fiscal policy can be used to support growth.”

       Kuwait was first to announce a 25-basis-point increase in its discount rate, taking it to 1.75%. The oil-rich nation has more flexibility in setting rates as it maintains a peg to a basket of currencies.

       Inflation in Kuwait is among the highest in the Gulf after accelerating in January to an annual 4.3%, the fastest since at least 2017.

       Bahrain raised its key policy rate to 1.25%, its overnight deposit rate to 1%, the four-week deposit rate to 1.75%, and lending rates to 2.5% from 2.25%.

       The central bank of the UAE raised the overnight deposit rate by 25 basis points, while the Saudi Central Bank raised its repo rate by 25 basis points from 1% to 1.25% and the reverse repo rate by 25 basis points from 0.5% to 0.75%.

       Sama, as the bank is known, said in its communique that the adjustments are consistent with policymakers’ “objectives of maintaining monetary stability and supporting the stability of the financial sector in the evolving domestic and international monetary conditions.”

       Qatar only partially followed the Fed, raising its repurchase rate by 25 basis points to 1.25% but keeping its lending and deposit rates steady at 2.5% and 1%.

       With the Fed likely to embark on a prolonged period of higher rates, the pace of its monetary tightening could create a dilemma across the six-member Gulf Cooperation Council (GCC) as authorities look to sustain non-oil economic growth and diversify away from energy.

       In the Fed’s so-called “dot plot,” officials’ median projection was for the benchmark rate to end 2022 at about 1.9% and then rise to about 2.8% in 2023.

       They estimated a 2.8% rate in 2024, the final year of the forecasts, which are subject to even more uncertainty than usual given that Russia’s invasion of Ukraine and new Covid-19 lockdowns in China are buffeting the global economy.

       A rebound in non-oil economic activity and low real rates when adjusted for inflation should provide the region’s economies enough scope to absorb the Fed’s rate hikes this year, said Monica Malik, chief economist at Abu Dhabi Commercial Bank PJSC.

       “The stability linked to the pegs outweighs the fact that the US and GCC countries can be in different economic cycles or have different inflation rates,” she said.

       Countries in the region were hit hard by the pandemic in 2020 as coronavirus lockdowns and disruptions to trade and tourism coincided with a slump in crude oil, their main source of income. — Bloomberg