ع
The US Federal Reserve raised its benchmark rate by 25 basis points to a 3.75-4 percent range on September 17 in a move that most Gulf central banks promptly mirrored as the region grapples with added spending pressures from the Iran conflict. Saudi Arabia increased its key repo rate to 4.5 percent while the UAE adjusted its overnight deposit facility to 3.9 percent, with Oman, Qatar and Bahrain also implementing comparable hikes, Reuters reported. Kuwait was the exception, leaving rates unchanged as it cited the strength of its monetary and financial stability.
An Arabian Gulf Business Insight analysis published on the day of the decision found that the hike will compound pressure on Gulf borrowing as states ramp up expenditure in response to the regional situation. The publication noted that although the rate adjustment contributes to higher costs, the direct economic effects of the conflict remain the dominant factor affecting regional balance sheets. Elevated inflation stemming from higher energy prices along with a robust American economy and job market had set the stage for the anticipated Federal Reserve action.
Yields on three-year and 10-year US Treasuries had already climbed in preceding weeks to levels not seen in two decades, the AGBI report indicated, with additional rises recorded in two-year and 10-year yields following the announcement while 30-year yields eased. Market indices reacted with the Dow Jones falling 1.2 percent, the S&P 500 declining 0.4 percent and the Nasdaq remaining largely unchanged. Lenders to Gulf sovereigns and corporates are expected to seek higher spreads because of ongoing regional developments, according to economist Callen cited in the analysis.
Callen added that interest costs on Gulf borrowing would climb only gradually since many earlier debt issuances were concluded at fixed rates. The AGBI assessment observed that Gulf businesses have begun adjusting to the prolonged consequences of the conflict even as financing conditions tighten for both public and private sectors across the dollar-pegged economies. This environment coincides with broader competition for global capital that has already pushed long-term Gulf sovereign bond prices to multi-month lows.
A prior AGBI review from August highlighted how surging US borrowing and an AI-driven investment boom are intensifying the challenge for Gulf entities seeking funds for deficits, infrastructure and private-sector growth. Higher US yields raise reference rates for GCC borrowing through the currency peg and tighten local liquidity, economists told the publication at the time. The latest rate move therefore arrives as regional authorities navigate fiscal strains that have prompted scaled-up borrowing requirements.
Reuters noted separately that the Federal Reserve’s step responded to persistent price pressures amplified by the conflict alongside other economic forces, prompting aligned policy shifts throughout most of the GCC. These developments follow earlier warnings from bodies such as the International Institute of Finance that projected potential contractions in Gulf current account surpluses under pessimistic conflict scenarios. The combined effects continue to shape financing strategies for businesses operating in the region.
