Kuwait holds key rate, cuts other rates to curb dinar rise

     Kuwait's central bank, which pegs its dinar currency to a weighted basket of currencies, left its benchmark discount rate steady but lowered the interest rate on other monetary policy instruments in response to a decline in U.S. interest rates which it said was putting upward pressure on the dinar.

     The Central Bank of Kuwait (CBK) kept its benchmark discount rate at 1.50 percent, unchanged since March 16 when it lowered its for the second time that month for a total cut of 125 basis points this year.

     But CBK cut its policy instruments that cover the entire interest rate yield curve up to 10-year terms, including its repo rate, term deposit rates, direct intervention rates and those on public debt by 0.125 percent, it said on Oct. 27.

     "This came amid continued decrease in interest rates on federal funds of the US Federal Reserve inching closer to zero-levels, which widened the margin tipping the scale on the side of the interest on the Kuwait Dinar as opposed to interest on the US greenback, thus bolstering the attractiveness of the Kuwaiti currency," CBK said.

     It added the move was part of its special measures to tackle the impact of COVID-19 on economic and banking conditions, including its earlier cuts to the discount rate.

     Between 1975 and 2002 Kuwait's dinar was pegged to a weighted basket of the currencies of its major trading partners but from 2003 to 2007 it dropped that and pegged it directly to the U.S. dollar.

     But after the dollar's decline starting in 2002, Kuwait in May 2007 reverted to its earlier exchange rate policy of pegging the dinar to an undisclosed weighted basket of currencies to protect the dinar's purchasing power and curb growing inflationary pressures.

     After falling in in late March to a low 0.315, the dinar has steadily firmed against the U.S. dollar to 0.305 on Oct. 21.

     In response to CBK's move, the dinar eased to 0.306 to the dollar today, down almost 1 percent this year but up 3 percent since the low on March 26.

     The Central Bank of Kuwait issued the following statement:

CBK Maintains Current Historical Low Discount Rate, and Cuts Other Intervention Rates by 0.125%

"As part of Central Bank of Kuwait (CBK) vigilant monitoring of economic, monetary, and banking developments and forecast trends, as well as its periodic review of movements in interest rate trends on main currencies, the US Dollar being foremost, the CBK has decided to maintain the current Discount Rate, thus maintaining the current interest rate cap for loans extended to customers in Kuwaiti Dinar. In addition, CBK cut rates of other monetary policy instruments, by 0.125% for the entire interest rate yield curve terms matrix, up to the ten-year term. This includes repurchases (REPO), CBK Bonds, the Term-Deposits system, direct intervention instruments, as well as Public Debt instruments, effective 28-10-2020.

This came amid continued decrease in interest rates on federal funds of the US Federal Reserve inching closer to zero-levels, which widened the margin tipping the scale on the side of the interest on the Kuwaiti Dinar as opposed to interest on the US greenback, thus bolstering the attractiveness of the Kuwaiti currency.

The decisions also came as part of the CBK’s special measures to cope with the ramifications of the Covid-19 pandemic on economic and banking conditions, most importantly employing facilitatory monetary policies regarding interest rates through cutting the Discount Rate to historical lows to reach 1.5%.

In a press statement His Excellency the CBK Governor, Dr. Mohammad Y. Al-Hashel pointed out that CBK market intervention measures fall within its monetary policy which aims to bolster economic recovery in non-oil sectors and to maintain and buttress the attractiveness of the Kuwaiti Dinar as a lucrative and reliable vessel for domestic savings, the latter being a mainstay of monetary policy.

The Governor added that the decisions were taken after a thorough scrutiny of the latest economic, monetary, and banking data and information available, including indicators of general economic performance, local liquidity levels, developments in deposits, and interest rates on both the Kuwaiti Dinar and on main foreign currencies.

Dr. Al-Hashel concluded the statement by stressing the Bank’s unwavering policy of vigilant monitoring of economic, monetary, and banking developments according to latest available data and in light of policies implemented towards safeguarding financial and monetary stability."

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