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Following the actions of the US Federal Reserve, the central banks of the UAE, Saudi Arabia and Bahrain lowered their interest rates by 25 basis points, or a quarter of a percentage point, effective August 1, 2019.
Due to their currency peg to the US dollar, these Gulf countries generally mirror interest rate action taken in the US. As Kuwait’s currency is pegged to a basket of international currencies, it left its interest rates unchanged.
Any interest rate reductions lower the cost of borrowing for customers, positively impacting interest rate sensitive sectors such as automotive and real estate. Customers can now avail reduced rates on loans, mortgages and credit cards.
The US Fed has resorted to a rate cut for the first time in over 10 years to mitigate the risks of a possible economic slowdown. Should the central bank see any further risks to economic growth, it may lower rates further during the year, with some central banks in the Gulf following suit.
Rate cuts are generally undertaken to give a boost to economic growth while encouraging customer and corporate spending. On the other hand, for banks, lower interest rates impact their earnings as they earn higher interest income when rates are high.
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