The U.S. Federal Reserve yesterday raised its target interest-rate range by 25 basis points to between 3.75% and 4% in a unanimous decision by the Federal Open Market Committee. It was the first rate increase since 2023, prompting Gulf central banks to tighten monetary policy and raise financing costs.
Interest rates quickly pass through to Gulf states
The Saudi Central Bank raised its repurchase agreement rate by 25 basis points to 4.50% and its reverse repurchase rate to 4%. The UAE central bank also raised its base rate for overnight deposit facilities to 3.90%, while the Central Bank of Oman raised its repo rate to 4.50%.
The Qatar Central Bank raised its deposit rate by 25 basis points to 4.10%, its lending rate to 4.60% and its repo rate to 4.35%, with the decisions taking effect on Thursday, September 17. Bahrain raised interest rates by 25 basis points, while Kuwait left its rates unchanged.
This divergence reflects differences in exchange-rate regimes and monetary policies across the Gulf. International Monetary Fund estimates indicate that economies with fixed or tightly managed exchange rates generally need to align their monetary policy with the reference currency, while maintaining sufficient foreign-exchange reserves to address the risk of capital outflows.
U.S. inflation keeps tightening in place
The Fed's decision came as U.S. inflation remains above its 2% target. September projections show personal consumption expenditures inflation reaching 3.7% by the end of 2026, up from 3.6% in the June projections, while the economic growth forecast was raised to 2.3% and the unemployment forecast was lowered to 4.1%.
Projections by monetary policymakers point to the possibility of another rate increase. Sixteen of the 18 participants expect to raise rates at least once by a quarter of a percentage point before the end of 2026, while the Fed does not expect inflation to return to 2% before 2029.
The Fed links persistent inflationary pressures to higher energy prices, tariffs and strong capital spending tied to the artificial-intelligence boom. Its chair, Kevin Warsh, said inflation remains elevated and that the decision aims to support a faster return to 2%.
The dollar and debt determine the scale of the Arab cost
Ali Al-Ghanbouri, an economic expert and analyst and head of the Center for Economic and Social Foresight, said the rate increase would affect more than the U.S. economy, boosting the dollar's appeal and raising the cost of external financing, particularly for countries and companies that rely on borrowing in the U.S. currency.
Al-Ghanbouri added that continued U.S. monetary tightening could prompt Arab central banks to keep interest rates high, particularly in economies that peg their currencies to the dollar to protect exchange-rate stability. Energy-exporting countries could benefit partially from higher oil prices and dollar revenues, he said, while energy-importing countries would face greater pressure on import bills, inflation and external accounts.
Al-Ghanbouri said the impact of the decision on Morocco would depend on movements in the dollar, energy prices, financing costs in international markets and the development of external demand. Pressures could feed through to energy, food, raw-materials, equipment, machinery and consumer-goods prices as import, transport and production costs rise.
Amin Sami, an international adviser on economics and strategic planning, said the decision effectively reprices the cost of dollar-denominated money worldwide. The size of the shock in each Arab country would be determined by factors including its exchange-rate regime, foreign-currency debt, reliance on imports, the size of its reserves, and its domestic inflationary and fiscal conditions.
Pressure on households, companies and public finances
Local central banks' response of raising interest rates could increase the cost of new and variable-rate loans, putting pressure on household borrowing and spending, as well as on housing, car and durable-goods financing and investment by small and medium-sized companies.
Sami said households could face a double squeeze if higher living costs coincide with higher borrowing costs, through imported-goods prices, loan interest rates, slower job creation and any potential increases in indirect taxes or the prices of subsidized services. He identified three sources of pressure on companies: higher costs for imported materials and financing, and weaker domestic demand, with small and medium-sized companies more exposed.
Energy, transport and food are the sectors most exposed to pressure, as a stronger dollar could increase the local-currency cost of oil, gas, grains, oils, sugar and animal feed. The impact also extends to aviation, tourism, industry, technology and telecommunications because fuel, aircraft, spare parts, machinery, chips, software and cloud services are priced in dollars to varying degrees.
Monetary tightening also affects public finances when external debt is refinanced or new debt is issued at higher yields. Sami linked the increase in debt-servicing costs to the combination of higher U.S. interest rates, a stronger dollar, higher bond yields and the need to refinance large debts, which could raise the cost of new debt even without an increase in principal.
Measures to contain the pressure include rescheduling debt maturities, relying more on domestic financing, turning to multilateral financing, reprioritizing public investment, improving tax collection, mobilizing public assets and redirecting subsidies. Fiscal tightening during an economic slowdown, however, could put pressure on household incomes, investment and employment.
A 25-basis-point increase in U.S. interest rates does not mean that every Arab economy will experience a matching increase. The repercussions vary according to exchange-rate regimes, reserves, debt, the composition of imports and domestic production capacity, through three main channels: interest rates, the dollar exchange rate, and the cost of debt and financing.
