Kuwait breaks with the Fed, holds discount rate at 3.5%

Summary

• The Central Bank of Kuwait kept its discount rate unchanged at 3.5%.
• Other Gulf central banks raised rates in step with the US Federal Reserve.
• The dinar's currency-basket peg gives Kuwait policy room its neighbors lack.

The latest

Kuwait's discount rate stays at 3.5% after the central bank declined to follow the US Federal Reserve's latest increase, CNBC Arabia reported. Other Gulf central banks moved higher the same day, tracking the Fed as their dollar pegs require. It is not the first time Kuwait has parted ways with Washington on rates.

Details

• The decision: The Central Bank of Kuwait held its discount rate at 3.5%, leaving policy unchanged while the US Federal Reserve tightened, according to CNBC Arabia. The hold applies to the benchmark that anchors lending costs across the Kuwaiti banking system.
• The divergence: Other Gulf central banks raised their rates this time in line with the Fed, CNBC Arabia reported. Their currencies are pegged directly to the US dollar, which leaves them little practical room to hold when Washington moves.
• Why Kuwait can: The Kuwaiti dinar is pegged to a basket of currencies rather than to the dollar alone. That structure gives the central bank scope to set rates according to domestic economic conditions instead of matching every Fed decision automatically.
• Not a first: This is not the first occasion on which the Central Bank of Kuwait has diverged from a Federal Reserve rate decision, according to the report — placing the hold within an established pattern rather than treating it as a one-off break.
• Market voices: CNBC Arabia cited Talal Al-Yousef, deputy head of asset management at Al Safat Investment Company, and Abdullah Al-Sumait, deputy chief executive of Al Ahli Bank of Kuwait, among those commenting on the decision.
• The Fed backdrop: Bank of America warned in separate CNBC Arabia reporting that the Fed's policy rate could climb above 5% in the new hiking cycle, a trajectory that keeps pressure on dollar-pegged Gulf central banks to continue raising.
• Not specified: The central bank did not announce a timetable for revisiting the rate, and no schedule was given for the next policy review. The size of any future move was left undefined.

Background

Most GCC states peg their currencies to the US dollar and therefore import Federal Reserve policy almost directly. Kuwait is the exception: its dinar tracks an undisclosed basket of currencies, a framework that has repeatedly allowed the central bank to set rates on its own timing.

Between the lines

The gap between Kuwait's hold at 3.5% and its neighbors' increases widens with every Fed move, and Bank of America's above-5% scenario implies that gap could grow further. A basket peg only creates room; using it repeatedly, as the central bank has done before, signals that domestic conditions are being weighted over external alignment.

What's next

Watch the Federal Reserve's next rate decision and whether Kuwait holds again or closes the gap, plus any movement in Kuwaiti bank lending rates and deposit pricing after the unchanged discount rate.

Source: CNBC Arabia