The Wall Street Journal-20080201-Credit Crunch- Arab Countries Follow Fed on Rates

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Credit Crunch: Arab Countries Follow Fed on Rates

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A WSJ News Roundup

Arab countries in the Persian Gulf brushed aside inflation risks and joined the Federal Reserve in cutting rates, seeking to hold their currencies steady against the dollar.

Asian central bankers, meanwhile, indicated they are prepared for similar action if their economies start ailing.

For the second time in two weeks, Saudi Arabia, the United Arab Emirates, Bahrain, Qatar and Kuwait cut key rates yesterday. Oman is expected to follow suit next week.

Wednesday, the Fed cut U.S. rates by half a percentage point to 3%. That followed three-quarter percentage-point cut last week.

Gulf oil producers that peg their currencies to the dollar must match Fed rate moves to avoid speculative inflows of funds aimed at exploiting interest-rate differentials. But with inflation often in double digits as the economies of the oil-rich states boom, economists say the Gulf states should be raising rates, rather than cutting them. Kuwait's currency no longer is pegged to the dollar.

Meanwhile, comments from the Bank of Japan and its counterparts in Hong Kong, South Korea and the Philippines suggested they aren't persuaded the Fed's cuts will be enough to stave off a slowdown in the U.S., a key market for Asia's exports.

In a speech to business leaders yesterday, Kiyohiko Nishimura, a board member of the Bank of Japan, hinted that his country -- which until recently was looking for the right conditions to raise its 0.5% policy rate -- might need to be ready to return to rate cuts to stave off recession. However, he ruled out such cuts anytime soon.

Jang Byung-Wha, a director-general in the Bank of Korea's financial markets department, told Dow Jones Newswires the odds of a cut in South Korea's 5% overnight call rate target have now increased, given the negative outlook for the U.S. economy.

Yesterday, the Hong Kong Monetary Authority lowered its base rate by 0.5 percentage point because of the Hong Kong's dollar peg to the U.S. currency.