DUBAI: Saudi Arabia's central bank said on Wednesday it had cut key interest rates to preserve monetary stability, after the Federal Reserve lowered U.S. interest rates for the first time in over a decade.

The central banks of the United Arab Emirates and Bahrain also cut their benchmark interest rates, but the Kuwaiti central bank kept its key policy rate unchanged.

Unlike other Gulf central banks whose currencies are pegged to the U.S. dollar, Kuwait's currency is pegged to an undisclosed weighted basket of international currencies of its major trading and financial partners.

The Saudi Arabian Monetary Authority said in a statement it had cut its repo rate, used to lend money to banks, to 275 basis points from 300 bps, and the reverse repo, the rate at which commercial banks deposit money with the central bank, by the same margin to 225 bps.

The Saudi riyal is pegged to the U.S. dollar and the central bank follows the U.S. Federal Reserve on interest rate moves.

Analysts expect rate cuts to hurt the margins of Saudi banks, which made record profits of around 50 billion riyals ($13.3 bln) in 2018 following several interest hikes over the past few years.

The stock market had priced in the expected impact. Saudi banking shares fell sharply last week before strong quarterly earnings gave the index another boost.

Saudi economic growth has been sluggish this year, hit by output cuts by oil producers to support prices.

On Tuesday, Saudi Arabia posted a budget deficit of 33.5 billion riyals ($8.9 billion) for the second quarter of this year, reversing a surplus in the first quarter, its first since 2014. 

(Reporting by Asma Alsharif, Marwa Rashad, writing by Saeed Azhar, Editing by Davide Barbuscia and Catherine Evans) ((Saeed.Azhar@thomsonreuters.com; +971 44536787; Reuters Messaging: saeed.azhar.reuters.com@reuters.net))