Kuwait cut its repurchase rate for the second time in six weeks on Sunday in what appeared to be its latest move to deter speculators betting on an appreciation of the oil exporter's dollar-pegged dinar currency.
The central bank cut the repo rate by 25 basis points to 5.50 percent, making it cheaper for Kuwaiti banks to borrow money for one week from the central bank, which could put more dinars on the market and reduce any upward pressure on the exchange rate.
The central bank's last repo rate cut was by 12.5 basis points on April 1, four days after it warned currency speculators against betting on an appreciation of the dinar. "People have called off the revaluation bet. This move is trying to reinforce that by making it less desirable to buy the dinar," said Steve Brice, regional head of research at Standard Chartered in Dubai.
Central bank officials were not immediately available for comment. The bank made no statement on the move and left the benchmark discount rate unchanged at 6.25 percent. The bank usually tracks policy moves by the US Federal Reserve to maintain the relative yield of dinar assets. The Fed kept its benchmark rate steady at 5.25 percent after a meeting of policymakers on May 9. Kuwait and five other Gulf Arab oil producers have pegged their currencies to the dollar to prepare for monetary union in 2010.
With the monetary union timetable in doubt after Oman, one of the six, opted last year not to meet the deadline, speculation has grown that some Gulf states would revalue their currencies.
The International Monetary Fund urged Kuwait on Sunday to resist market pressure to revalue, saying any change to its dollar-peg risked undermining confidence in a stable exchange rate.
"The gains from revaluation will be very small. The cost you incur is that you lose the perception of currency stability," Mohsin Khan, director of the IMF's Middle East and Central Asia department, told Reuters in an interview.
Kuwait was named as a top candidate for a revaluation in a Reuters poll of analysts in March.
Deutsche Bank said in a report last week it expected Kuwait to allow the dinar to appreciate by 3 percent in the next six months to check inflation and soak up cash pouring into the economy.
The dinar, which was allowed to appreciate around 1 percent against the dollar in May last year, is trading at the strong end of the central bank's 3.5 percent band at $0.28914.
Speculators have been betting Kuwait would allow the dinar to gain to offset the impact of the falling dollar on the cost of some imports, which is fuelling inflation.
Inflation has been running at 3-4 percent in the past nine months compared with a historical average of less than 2 percent, Deutsche said. Kuwaiti inflation was 5.15 percent at the end of March, driven by higher rents and food costs, according to data from the Ministry of Planning released on Sunday.
Kuwait has blamed rising inflation on the falling dollar, which tumbled to a record low against the euro in April. State news agency KUNA ran a report in March saying the peg to the dollar was viewed as "source of trouble".
The IMF's Khan said imported inflation was only a small part of the problem.
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