* Gulf central banks lift policy rates in line with Fed
* But interbank money rates rise only marginally
* UAE three-month rate actually falls
* Region may be over worst of liquidity squeeze
* Improvement in Saudi to affect whole region
By Andrew Torchia
DUBAI, Dec 15 Money market rates in the Gulf
barely rose on Thursday after the U.S. Federal Reserve tightened
policy - a sign that the region's worries over a bank funding
squeeze have partly eased because of higher oil prices and
Gulf central banks scrambled to raise their policy rates by
a quarter of a percentage point in the hours after the U.S.
central bank hiked its federal funds target by that margin on
Wednesday and signalled three hikes in 2017, more than expected.
Because of its currency pegs to the dollar, the Gulf region
must stay in line with U.S. monetary policy or risk debilitating
But the region's interbank money rates up to one year rose
by only around 2 to 4 basis points on Thursday, with Saudi
Arabia's three-month interbank offered rate edging
up to 2.049 percent from 2.025 percent.
Qatar saw a similar rise and in the United Arab Emirates,
the three-month rate actually dropped, to 1.334
percent from 1.403 percent, suggesting some banks released funds
when the market proved softer than they had expected.
Bankers attributed the calm in Gulf money markets partly to
signs that the region may be past the worst of a funding squeeze
triggered by low oil prices.
In late 2015 and much of 2016, money rates soared to
multi-year highs, alarming banks and threatening to raise
corporate borrowing costs, as governments' oil revenues shrank
and flows of petrodollars deposited in the banks diminished.
Pressures on the banks remain, but in the last two months
the situation has improved in several ways. Brent oil is around
$55 a barrel compared to this year's average of about $45.
Meanwhile, Saudi Arabia's government opened a new channel to
fund its budget deficit with a mammoth $17.5 billion
international bond issue in October. Many bankers expect another
foreign issue in the first quarter of 2017, reducing the need
for Saudi banks to finance the deficit.
"The liquidity situation has improved - confidence is
gradually improving and oil prices are contributing to rates not
rising as fast as expected," said John Sfakianakis, director of
economic research at Gulf Research Centre in Riyadh.
He said Saudi Arabia's state budget, expected to be released
in about 10 days, would help determine money rates' direction by
showing Riyadh's spending and borrowing intentions.
Jadwa Investment said central bank steps in recent weeks,
such as the introduction of new market tools to inject funds,
would prevent the U.S. hike from having much impact on Saudi
On Wednesday night, the central bank raised its reverse
repurchase rate, at which commercial banks deposit money with
it, by 0.25 percentage point. But it kept its repurchase rate,
used to lend money to banks, unchanged at 2.00 percent - a
signal that it will fight tighter liquidity.
Banks elsewhere in the Gulf have been shipping funds to
Saudi Arabia because of rising rates there, so better liquidity
in Riyadh could ease pressure in other regional centres.
Monica Malik, chief economist at Abu Dhabi Commercial Bank,
said Gulf money rates might keep rising in 2017 because of U.S.
hikes and a possible pick-up in credit demand to finance big
infrastructure projects in Dubai and Qatar.
But she added: "Upward pressure on market rates could ease
to some extent in the Gulf next year. Certainly the better
liquidity picture in Saudi Arabia has an impact on the whole
(Reporting by Andrew Torchia; Editing by Gareth Jones)