DUBAI, Dec 17 (Reuters) - Financial markets in the Gulf reacted calmly on Thursday to the first U.S. interest rate hike in nine years, suggesting most investors think the region can defend its currency pegs to the dollar for the foreseeable future.
The U.S. Federal Reserve lifted the range for its benchmark interest rate by a quarter of a percentage point on Wednesday, threatening to suck funds out of the Gulf and adding to pressure on the currencies of the region’s wealthy energy exporters.
Three Gulf central banks - Saudi Arabia, Kuwait and Bahrain - sought to defend their currencies by hiking their own key rates by a similar margin within half an hour of the Fed’s decision. A fourth, the United Arab Emirates, followed suit on Thursday.
Short-term money market rates in the Gulf rose moderately on Thursday but currencies barely moved in the forward foreign exchange market, while bond prices were steady.
Banking stocks in the Saudi Arabia and the United Arab Emirates rose as investors bet that higher interest rates at home and abroad would expand banks’ lending margins.
Fund managers said the markets’ response showed investors believed the Gulf could ride out an era of rising interest rates, even though tighter credit promises to combine with low oil prices to slow economic growth.
Sergey Dergachev, senior portfolio manager for emerging market debt at Union Investment Privatfonds in Germany, said the speedy action by Gulf central banks following the Fed decision had helped to quell market jitters.
“The strong and swift response, especially by Saudi, is a signal to the market that pegs will be maintained, and all rumours about pegs collapsing are far-fetched,” he said.
The money markets’ reaction suggested a large proportion of the initial interest rate hikes had already been factored into the markets.
After the Saudi central bank raised its reverse repurchase rate by 0.25 percentage point, the three-month Saudi interbank offered rate climbed 10 basis points on Thursday to 1.37 percent, its highest level since January 2009.
Interbank money rates in the United Arab Emirates and Kuwait rose by smaller margins.
“Gulf money markets are more clued on to local liquidity conditions, as the rise in overnight rates in the past quarter has highlighted, and do not view Fed policy as a game changer - at least not in the current expected trajectory,” said Anirban Kundu, head of investment advisory services at Saudi Fransi Capital.
Nevertheless, some analysts said tightening U.S. monetary policy could still cause volatility in Gulf markets in future, as Gulf central banks could be pressured into imitating U.S. rate hikes even as their economies slowed. Many analysts expect two or three further U.S. rate rises in 2016.
“We could experience higher levels of market volatility and headwinds from higher longer-term rates,” said Mohieddine Kronfol, chief investment officer for regional fixed income at Franklin Templeton Investments. (Additional reporting by Matt Smith; Editing by Tom Heneghan)