The currency framework in the GCC is radically different than in most Asian countries as Gulf currencies are pegged to the US dollar, with either a nominal anchor or a softer peg to a basket of currencies such as in Kuwait.
A peg means a loss of policy independence due to following the policy rates of the reference currency or risk capital outflows, according to a report released by Asiya Capital Investments Company.
The US raised interest rates this month after seven years of ultra-loose monetary policy.
However, the American economy still faces substantial threats, mainly on the external front as global demand remains fragile and the USD strengthens.
The report showed that Gulf countries already adapted to the new situation; the Saudi Arabian Monetary Agency (SAMA) already hiked its reverse repo rate by 25 basis points to 0.5% and Kuwait, UAE and Bahrain also reacted to the Fed’s decision.
Asian central banks can try to offset the effects of US monetary policy by raising interest rates, but this would squeeze growth and potentially fuel deflationary expectations.
At the same time, the GCC is highly exposed to the deteriorating energy market, which accounts for half of the economy and 85% of public revenue.
