Borrowing costs increase in the UAE

The UAE Central Bank set its first overnight repurchase rate at 4.75 per cent, effectively raising borrowing costs at a time when it is under pressure to cut rates to maintain a currency peg to the dollar.
The UAE does not have a benchmark interest rate and until Tuesday had guided interbank borrowing costs by selling dirham-denominated certificates in maturities ranging from one-week to 18 months.
As part of a new set of monetary policy tools employed from Wednesday the central bank said it would allow the country's first repurchase agreements, setting the rate at which it would lend funds to banks.
The overnight repo rate was set at 4.75 per cent yesterday, the Central Bank said. That was higher 25 basis points higher than any of the certificates of deposit rates last set under previous policy regime on Tuesday.
"This is a form of monetary tightening," said Monica Malik, regional econ-omist at investment bank EFG-Hermes in Dubai.
"The overnight repo will be a key rate because it will determine lending rates. It is a signal that the Central Bank wants to slow down credit growth," she said.
Dollar pegs force the UAE and other Gulf nations to track US monetary policy at a time when their booming economies are out of step with the United States. The US Federal Reserve has cut its benchmark rate by 75 basis points since September 18 to 4.5 per cent to contain the fallout from the credit crisis.
Until Tuesday lending rates in the UAE had been based on certificate of deposit rates set by the Central Bank on paper ranging in maturity from one week to 18 months.
On Tuesday, the last day certificate rates were fixed by the Central Bank, the highest yield was 4.5 per cent on the one-month and three-month certificates.
The bank switched on Wednesday from a fixed rate sale to daily auction of certificates where demand would determine the yield on paper with maturities ranging from one week to 12 months. It has not released the results of the daily auction, but bankers at Emirates NBD, the Gulf's largest lender by assets, said one-week and one-year rates fell after the auction. The UAE central bank cut rates on its certificates of deposit by as much as 20 basis points last week to deter bets on an appreciation of the dirham.
Denial
Meanwhile, Central Bank Governor Sultan Nasser Al Suwaidi denied a magazine report that the country would allow its dirham to rise by up to five per cent as early as Sunday, a newspaper said.
"The governor said that reports about the Central Bank allowing the dirham to rise between three per cent and five per cent on National Day next Sunday were not true," Al Ittihad reported. Arabian Business cited sources close to the central bank as saying the UAE could allow its currency to appreciate as early as National Day on Sunday