The Standard & Poor’s Credit Ratings Agency (S&P Global) has predicted that the US Federal Reserve Board (FRB) could begin cutting interest rates in December 2024, anticipating that most Gulf central banks will follow suit.
The credit agency expects the profitability of GCC Banks to remain strong in 2024, as they continue to benefit from high interest rates, as well as supportive economies, contained leverage and a high level of precautionary reserves.
At the end of 2023, the average return on assets of the top 45 banks in the region reached 1.7%, an increase from the 1.2% recorded at the same time in 2021, S&P said.
“Every 100 bp drop in rates shaves an average of around 9% off rated GCC banks’ bottom lines”
S&P report
Going into 2025, S&P predicted that the Fed will cut interest rates by 100 basis points throughout the year, bringing them down to between 4 and 4.25% at year-end.
As the currencies of most GCC nations are pegged to the US dollar, the central banks of these nations are expected to mirror the US interest rate policy, the agency added, noting that delaying interest rate cuts would boost their profitability.
The agency added that lower rates are likely to reduce the unrealised losses that GCC banks have accumulated over the past couple of years, estimated at around $2.8 billion for the GCC banks rated by S&P, or 1.9% on average of their total equity. Nonetheless, rate cuts would also bring forth a slight deterioration in profitability for GCC banks.
Earlier this month, the US Federal Reserve decided to maintain interest rates at a 23-year peak of 5.25-5.50% amidst persistent increases in the cost of living, as well as indications of inflation easing at a slower rate than desired in recent economic reports.
At the time, Fed Chair Jerome Powell emphasised that inflation levels remained “still too high” and hinted that rate adjustments were not imminent until there was a more robust assurance of price growth trending towards the 2% target.
