Gulf Times - 13/5/2006

In less than three months the Qatar Central Bank (QCB) has announced another upward revision in the interest rates which will push up the deposit and lending rates of the local banks from next week.

The QCB revision in the interest rate is clearly a fallout of the changes announced in its rates by Federal Reserve on Wednesday.

The QCB interest rates are in line with the US Fed Reserve policies as the Qatari riyal is pegged to the US dollar (USD).

QCB’s interest rate framework has three components - QCB Deposit Rate, QCB Lending Rate and QCB Repurchase (Repo) Rate.

QCB in a release said all the three rates had been upwardly revised by 25 basis points (0.25%) with effect from yesterday (May 11).

According to the QCB the formal framework for its exchange rate policy is a fixed parity between the Qatari riyal and the USD at QR3.64 per dollar.

QCB’s new benchmark rate for deposits will be 5.15% against 4.9% earlier.

The lending rate will go up to 5.25% from the existing 5% and repo rate to 5.85% from the existing 5.6%, QCB said.

With lending rates going up, the cost of borrowing in both the retail and corporate segments will go up.

For a normal bank customer this means higher interest rates on vehicle and personal loans and credit card transactions.

On the other hand, the QCB move will result in a higher yield on deposits. Those parking money with banks in short and long-term products will receive better rates.

Although the QCB has revised its interest rates only by 0.25%, sources said the local banks are under no compulsion to stick to the 25 basis points revision made by the apex bank.

“What QCB notified was only a reference rate. The local banks are free to either match their lending/deposit rates with that of QCB or opt for higher rates. Invariably they have seen fixing them at a higher level,” they said.

Repo rate is the margin at which the central bank provides short-term loans to commercial banks against securities between two weeks and a month’s maturity period. This is also taken as the reference rate by commercial banks as they fix the rates for both deposits and lending.

The overnight deposit and loan transactions between QCB and commercial banks operating in Qatar are now being done through Qatar Money Market Rate facility, an electronic settlement mechanism.

Data available indicate that the QCB rate was 5% in May 2001 when the US Fed funds rate stood at 4%. QCB lowered the rate to 4.5% the same month itself - on May 19. The QCB rate went down to 4.25% on July 1, 2001, when the Fed Reserve slashed the rate to 3.75% a few days earlier on June 27.

QCB rates between July 2001 and July 2003 are as follows: (The date of fixing the rate is in brackets) - 4.25% (July 1, 2001), 4% (Aug 22, 2001), 3.75% (Sept 22, 2001), 3.25% (Oct 6, 2001), 2.75% (Nov 10, 2001), 2.5% (Dec 13, 2001), 2.4% (June 29, 2002), 2.3% (July 14, 2002), 2.2% (Aug 7, 2002), 2% (Nov 10, 2002), 1.98% (Feb 2, 2003) and 1.53% (July 7, 2003).