Interest rates in the UAE tightened further on Sunday as a credit crisis deepened and banks prepared for the possibility of having to draw upon emergency cash from the central bank.

Interbank lending rates climbed as banks scrambled for short-term cash to cover obligations and made preparations to access a Dh50 billion ($13.6 billion) emergency lending window opened by the UAE central bank, said a report in our sister publication, the Gulf Daily News.

'The issue here is short-term liquidity,' said the treasurer at a major Dubai bank.

Investors have fled stocks and withdrawn deposits placed in anticipation of a major dirham revaluation. Gulf central banks dampened those hopes in recent weeks by reaffirming their commitments to currency pegs.

'The liquidity shortage, which is global, is exacerbated in Dubai by the speculative flows in the currency being reversed so quickly,' the treasurer said, adding that he was making the necessary preparations to tap the central bank facility in case his bank ran short of funds.

One-month rates rose to 3.95625 per cent compared to 3.7625 per cent on Thursday, continuing its steady climb since early June and hitting the highest level since early this year.

'No, we have not drawn, and we will use the facility only if we need it. We have not felt the need yet,' a senior treasury official of Abu Dhabi Commercial Bank said.

'But that does not mean we will not use it in the future if we need it,' he said.

Last week, the UAE central bank said it would offer banks short-term funds through the Dh50 billion facility in an emergency move to ease tensions in money markets as it sought to stave off the global credit crunch.

A treasury manager of Union National Bank said it was too early to make any decision on whether and how to use the central bank facility.

'We are still studying the directives of the central bank and we will weigh different options,' he said.

'No bank wants to be known publicly that it went to the central bank to ease its liquidity, even if it is short-term,' he said.

Some banks said they are still 'digesting' the central bank circulars, particularly one which allows banks to borrow against certain debt securities.