UAE decision not to cut rates will woo foreign funds

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The current level of liquidity in the UAE is satisfactory and will not be affected by the UAE's Central BankUAE's Central Bank's decision to hold the interest rates. The move is also expected to attract more funds from the foreign market into the country, bankers say.

However, there are no worries of inflow of huge hot money to benefit from the differences in interest rates between the UAE and global markets as the global markets are already facing tight liquidity conditions.

"The Central BankCentral Bank is acting according to its assessment of the monetary situation in the country. Due to the global financial crisis, every country around the world is focusing on retaining its liquidity and attracting capital from international markets," said Nasser Al Saidi, chief economist at the Dubai International Financial Centre.

Experts say the Central BankCentral Bank's decision would have no significant impact on the monetary situation.

"The US Fed has already slashed interest rates to nearly zero and the difference between interest rates in the UAE and the US is very marginal, which will not attract investors to exploit the financial system.

"There is limited room for hot money because of the current liquidity tightness in global financial markets. I think the Central BankCentral Bank has analysed these risks very well and accordingly decided not to follow Fed's policy to cut rate," said a banker who preferred anonymity.

Dr Hammam Al Shamaa, financial consultant of Al Fajr Securities, agreed there was a very limited room for hot money to inflow the domestic financial system.

"The differences in interest rates are still marginal and the expected profits from these differences will not even cover administrative costs of transferring money into the country.

"Local banks are still suffering from tightness in liquidity and reducing interest rates may push them to liquefy their Certificates of Deposits. The Central BankCentral Bank preferred to keep the current interest rates to avoid such potential action from the banks," he said.

Shamaa also ruled out the possibility of dirham de-pegging with the dollar at the current stage.

"The decision to keep the UAE interest rates has nothing to do with the dirham peg because the idea is not on the table at the current stage due to local and international financial issues.

"The central bank will never de-peg the dirham during the next period because the cost will be huge.

Any dirham de-pegging will increase the dirham purchasing power to very high levels while oil revenues are declining and the dollar value is still at low levels," Shamaa said.

By Mohamad Al Kady

© Emirates Business 24/7 2008