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Kuwait lowers repo rate ahead of likely US cut

Kuwait City, September 12, 2007

Kuwait, the Middle East's fourth-largest oil exporter, cut its repo rate by 25 basis points on Wednesday to 5.25 percent, ahead of an expected interest rate cut in the United States next week.

 "They are just pre-empting an expected 25-basis-point rate cut by the Fed at its meeting," said Kamal Jagtiani, a broker at Pan Arab Management in Kuwait.

"People are still selling dollars to buy Kuwait dinars, which is a high-yielding currency, and they have to invest it somewhere ... They're investing it in the money market," Jagtiani said.

All but one of 20 US primary dealers polled by Reuters last week expected the US Federal Reserve to reduce its benchmark rate at a Sept. 18 meeting. Fifteen of the dealers expected a 25-basis-point reduction.

Kuwait abandoned its peg to the dollar on May 20, saying the US currency's weakness was fuelling inflation by making imports more expensive. The US currency remains part of the basket against which Kuwait measures the value of its dinar.

The dollar hit a record low versus the euro and slid to a 15-year low against a basket of major currencies on Wednesday.

Wednesday's rate cut came despite data showing that money supply, an indicator of future inflation, grew in July at its fastest pace since 1994.

M3, the broadest measure of money circulating in the economy, rose 22.5 percent in the year to July 31.

"It is difficult to understand why the central bank, which is worried about inflation, would want to cut interest rates," said Standard Chartered Middle East economist Steve Brice.

Inflation in Kuwait came off 12-year highs in June to 4.36 percent. Consumer price inflation was above 5 percent for three consecutive months to May 31.

Kuwait's central bank governor said on Tuesday a decline in the value of the dollar, rising international prices and stronger domestic demand were driving inflation.

"From the outside, the increase of prices abroad as well as the impact of the exchange rate fluctuation, and the deterioration of the dollar exchange rate" are underpinning inflation, Salem Abdul-Aziz al-Sabah told reporters in Damascus.

"The internal factor is increasing aggregate demand," Sheikh Salem said on the sidelines of a meeting of Arab central bank governors in the Syrian capital.

Kuwait has not disclosed the composition of its currency basket. Standard Chartered estimates the US currency accounts for about 70 percent. - Reuters




Tags: Kuwait | Bank | repo rate |

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