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Bahrain cuts key rates to stimulate economy.

Byline: ARTHUR MACDONALD

MANAMA: The Central Bank of Bahrain (CBB) yesterday moved to pump prime the economy by cutting interest rates.

It reduced its lending rate and repo rate by half a per cent from 2.75pc to 2.25pc in a move seen as an attempt to encourage bank lending and economic growth.

It also cut its one week deposit rate from 0.75pc to 0.5pc but kept its overnight deposit rate at 0.25pc.

The action comes in the face of a slowdown in lending which has seen outstanding loans of Bahraini retail banks falling by 2.34 per cent to BD5.75 billion ($15.25bn) in July, from BD5.89bn in December last year.

This unilateral move is the first reduction since December which came in response to cuts made by the US Federal Reserve bank.

Since then, Bahrain has taken steps to ease tight credit conditions including lowering banks' reserve requirements in March.

"Things in the money market have actually improved, liquidity is not a major concern at the moment, it's about extending credit in the current environment," said Securities & Investment Company (SICO) head of research Jithesh Gopi.

"It's about confidence and willingness on the part of the banks. We're expecting provisions to continue to rise over the third and fourth quarter and that's what's holding them back, there is also uncertainty on the economic recovery."

"They are looking for some revival of credit growth while ensuring sound and prudent banking practices," said EFG-Hermes Dubai-based senior economist Monica Malik.

"We do not expect there to be a marked increase in credit growth as a result of the latest interest rate cuts."

The GCC states, with the exception of Kuwait, all peg their currencies to the US dollar and have for years tracked moves in US interest rates, which are now at virtually zero.

But that lock step policy has largely fallen by the wayside since last autumn as the global financial crisis deepened and Bahrain has now chosen to act on its own to stimulate the domestic economy.

Regional central banks have cut rates, reduced reserve requirements and injected liquidity into the banking system all in an effort to spur lending.

Bahrain's banks, like the rest of the region, have boosted credit provisions in the wake of the financial crisis. and as a debt implosion at two Saudi Arabian conglomerates ripple across the region.

Last month the CBB put two Bahraini banks, Awal Bank and The International Banking Corporation, into administration after they were found to be in trouble in the wake of the debt crisis at Saudi Arabia's Saad Group and Ahmad Hamad Algosaibi and Brothers when an investigation showed substantial shortfalls in assets compared to liabilities.

The central bank also said it would offer a foreign exchange swap facility with a one-month maturity.

It had previously offered one with a one-week maturity.

"The facility was initially introduced to help ensure the smooth and effective functioning of the money markets in Bahrain, an objective which has been successfully achieved," a spokesperson for the CBB said.

business@gdn.com.bh

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Publication:Gulf Daily News (Manama, Bahrain)
Date:Sep 16, 2009
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