Capital Economics predicts the U.S. Federal Reserve's impending rate cuts will force Gulf nations to follow suit due to their dollar pegs and open capital accounts, potentially easing debt servicing costs but with limited overall growth impact.
Investing.com -- The U.S. Federal Reserve ’s imminent loosening cycle is expected to ripple through the Gulf economies, as these nations' central banks are compelled to follow the Fed’s lead due to their dollar pegs and open capital accounts, according to a recent Capital Economics note.
Capital Economics’ U.S. team believes that the Fed will reduce the fed funds rate by 25 basis points at the September policy meeting, with further cuts to follow, totaling 200 basis points by the end of 2025. As a result, Gulf central banks will lower their own rates due to their dollar pegs. “Interbank interest rates closely track those in the US, albeit with a spread reflecting a premium demanded by investors to hold local currency instead of dollars.”First, lower interest rates will reduce debt servicing costs for businesses and households, providing opportunities to refinance or take on new loans at a lower rate.
Overall, the note concludes that while the Fed’s loosening cycle will bring lower interest rates to the Gulf, the broader economic impact will be limited. Capital Economics expects non-oil GDP growth across the region to slow, particularly as fiscal policy becomes less supportive over the coming years.
Federal Reserve Gulf Economies Interest Rates Dollar Pegs Economic Impact
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