Gulf savours prospect of first US Fed rate cut of 2025

Gulf watchers expect the US Federal Reserve to cut interest rates on Wednesday for the first time this year, with regional central banks likely to follow to protect their dollar pegs.

Reuters/Kent Nishimura | President Donald Trump is piling pressure on Federal Reserve chair Jerome Powell, right, to cut interest rates

• Analysts predict two more cuts

• Gulf central banks likely to follow

• Mixed signals from US economy

How far rates fall in the rest of 2025 remains unclear as economic indicators in America are sending mixed signals.

Opinions diverge in the Gulf about the direction the Fed will take, with futures markets suggesting three rounds of cuts by December, according to Junaid Ansari, ​​​director of investment strategy and research at Kamco Invest in Kuwait.

This also reflects mounting pressure from the White House for additional easing, he said.

But the latest US inflation reading last week came in hotter than anticipated, and more of the same is expected as tariffs make their full impact.

The US central bank “is likely to implement at most two 25 basis point (bps) cuts by the end of the year as it tries to balance a weakening labour market and a slowing economy with higher inflation rates”, Ansari said.

Recent revisions by the US Bureau of Labor Statistics indicate that, between April 2024 and March 2025, the American economy added nearly 1 million fewer jobs than previously estimated. In the latest figures, for the month of August, US payrolls increased by only 22,000, well below expectations for 75,000.

The job side is “quite weak”, said Chiro Ghosh, vice president of research at Sico Bank in Bahrain – feeble enough to expect a cut on Wednesday even as inflation remains elevated and other factors, such as ample money supply, put upward pressure on prices.

His team expects the Fed to cut its benchmark federal funds rate, at which banks borrow from one another overnight, three times before the end of the year for a combined 75 bps, at a minimum.

“But I won’t be surprised if we are surprised on the higher end,” Ghosh told AGBI.

Central banks in the UAE, Saudi Arabia, Bahrain and Oman will follow, he added. Qatar will too but might consider a more gradual adjustment. Kuwait, whose dinar is pegged to a basket of currencies thought to be heavily weighted toward the dollar, is also likely to cut less.

“Even in the upward cycle, Kuwait went with a much lower rate increase so it will most likely go with fewer [cuts],” Ghosh said.

The region is positioned to benefit from lower US rates.

Spreads between US and local financial instruments are slated to tighten as GCC issuers maintain strong credit profiles amid national diversification efforts and robust project pipelines, according to Ansari.

“The decline in average crude oil prices may put pressure on the fiscal front, but the low debt-to-GDP ratios should help the GCC governments easily raise funds in the international and local markets,” he said.

Prices of sovereign bonds in the Middle East and North Africa are undergoing a sustained rally ahead of the Fed meeting.

Sluggish equity markets across the region may also see revamped trading activity as broader optimism follows a US rate cut, Ansari said.

Lower rates could spur more corporate lending in countries such as Saudi Arabia where growth is especially strong, according to Mohamed Damak, a Dubai-based managing director for S&P and sector lead for financial institutions in the Middle East and Africa.

Struggling companies in sectors plagued by overcapacity, such as real estate in Qatar, might separately gain some “breathing space”, Damak said.

S&P Global Ratings’ Middle East team expects the Fed to lower rates by 50 bps this year, according to Damak.

The property sector more broadly will get a boost from renewed mortgage borrowing, sources say, as prospective homebuyers in the GCC have stayed on the sidelines in the hope that rates will come down again.

By Valentina Pasquali

September 16, 2025, 10:21 AM